international insolvency and restructuring guide

Table of Contents

DISCLAIMERForewordCountry ContributionsAustraliaAustriaBelgiumBrazilCanada including Quebec specific variationsChinaCosta RicaDenmarkEstoniaFinlandFranceGermanyGreeceIndiaIndonesiaIrelandIsraelItalyKoreaLatviaLithuaniaMalaysiaMauritiusMexicoThe NetherlandsNew ZealandRomaniaRussiaSerbiaSingaporeSouth AfricaSpainSwitzerlandTunisiaTaiwanUnited KingdomUruguayUSAVietnam

2

DISCLAIMER

The Members of the Law Firm Network are separate independent law firms and there is no legalrelationship between the law firms or with the Network itself

No member firm is responsible for the professional services performed by any other member firm

The Network itself is not a partnership and does not provide any professional services either in itsown name or otherwise

The contributions in this Insolvencey and Re-structuring guide are not advice merelyguidelines and any formal advice if required should be sought specifically and directly from therelevant law firm

3

The Law Firm Network

International

Insolvency and

Restructuring GuideNovember 2014

4

Foreword

The LFN Insolvency and Restructuring Group has collated this guide from contributions made byMembers of the Law Firm Network This guide is designed as a resource for all Members and theirclients This guide showcases the expertise that the Law Firm Network is able to call on throughout theworld and includes contributions representative of almost every legal system

Together we have provided a practical introduction to the real issues for distressed companies and theircreditors addressing commercial realities In the guide we have focussed on the following

1 The issues arising for a company when it is in financial difficulty

2 The available processes and necessary considerations for companies thinking of taking action torestructure or seek insolvency protection

3 The issues for secured and unsecured creditors of companies in financial difficulty

4 Financing options available and the necessary considerations for companies that wish to continuetrading during a restructuring or insolvency process

5 Alternative restructuring processes that can be undertaken without the need for court procedures

6 The need for international interaction and the cross border issues affecting distressed companies andtheir creditors

We thank all of the Contributors to this guide and hope it becomes your first point of reference Shouldyou need further advice or expertise then you should contact the relevant individual contributors

It has been a pleasure liaising with all contributors to create this guide which is a testament to the spiritco-operation and mutual benefit of the Law Firm Network

Anthony M D Kirwan

Executive Director


tkirwannetoverseascom

wwwnetworkedlawcom

5

Country Contributions

1 Australia

2 Austria

3 Belgium

4 Brazil

5 Canada

6 China

7 Costa Rica

8 Denmark

9 Estonia

10 Finland

11 France

12 Germany

13 Greece

14 India

15 Indonesia

16 Ireland

17 Israel

18 Italy

19 Korea

20 Latvia

21 Lithuania

22 Malaysia

23 Mauritius

24 Mexico

25 The Netherlands

26 New Zealand

6

27 Romania

28 Russia

29 Serbia

30 Singapore

31 South Africa

32 Spain

33 Switzerland

34 Taiwan

35 Tunisia

36 United Kingdom

37 Uruguay

38 USA

39 Vietnam

7

Australia

Philip Colman Partner Mason Sier Turnbullwwwmstcomau email philipcolmanmstcomau tel 61 3 8540 0240

In Australia there are many types of ldquoexternal administrationrdquo of companies These include voluntaryadministration (where an ldquoAdministratorrdquo is appointed) liquidation (where a ldquoLiquidatorrdquo is appointedand receivership (where a ldquoReceiver and Managerrdquo is appointed)

1 Issues arising when a company is in financial difficulties

How might a creditor take security over assets

Taking security over personal property

The Personal Property Securities Act (PPSA) has established a new national system that regulatessecurity over personal property The PPSA is based on similar systems in Canada and New Zealand

The PPSA determines the priority between competing security interests and the enforceability ofinterests in the case of an insolvency event A security interest over personal property can only beenforced in the case of the insolvency of the borrower if the security interest was registered on thePersonal Property Securities Register an online tool used to create maintain and release registrations

Taking security over real property

Security can be taken over land by way of mortgage These interests must be registered with theregulatory body of the appropriate Australian state Although registration is not mandatory a registeredinterest will usually take priority over an unregistered interest

Can transactions entered into by the company be vulnerable to attack

There are several means available to liquidators to attack certain types of transactions that are enteredinto by a company these are often referred to as the clawback provisions of the Corporations Act 2001(Cth) (Corporations Act)

Voidable Transactions

Where a company is insolvent and has entered into a commercial transaction that transaction may befound to be a voidable transaction in particular circumstances

A transaction is voidable if it is an insolvent transaction an unreasonable director related transaction ora transaction to defeat creditors (see below)

The transaction must have been entered into or an act was done for the purposes of giving effect to thetransaction during the two years ending on the relation back date (the date that the application forwinding up was filed or the date upon which a voluntary administrator was appointed or a liquidatorwas voluntarily appointed)

8

Two types of Insolvent Transactions

(i) Preferential transactions

A transaction of a company is an insolvent transaction if it is anunfair preference given by the company to a particular creditor in preference over other creditors withthe same or better rights The transaction must occur in the 6 months prior to the relation back dateUsually the transaction will involve a payment of a debt owed by the company to a creditor

(ii) Uncommercial transactions

A transaction of a company may be found to be an uncommercial transaction where a reasonable personin the companyrsquos circumstances would not have entered into the transaction having regard to the benefitsto the company of entering into the transaction the detriment to the company of entering into thetransaction and the respective benefit to other parties of the company entering into that transaction Anyother relevant matter may be taken into account

Unreasonable director related transactions

Liquidators may seek recovery of these transactions An unreasonable director related transactionincludes where the director or a close associate of the company is involved in a transaction with thecompany for little or no benefit to the company The question to be determined is whether it wasunreasonable for the company to enter into that transaction

Transactions to defeat creditors

Where a company is involved in an insolvent transaction and the company became a party to thattransaction for the purpose of defeating delaying or interfering with the rights of any or all of thecreditors on winding up of the company that transaction will be voidable

The transaction must be either entered into or an act must be done to give effect to the transaction within10 years of the relation back date in order for the transaction to be made vulnerable in this context

What director liabilities might arise from the company trading while in distress

In Australia there are both common law and statutory directorrsquos duties

When a company is in distress one of the main duties that will come into play is the duty not incur adebt while insolvent Where directors are found to have allowed the company to incur a debt ininsolvency they will become personally liable to pay the debt if the company goes into externaladministration and their personal assets may become vulnerable on the enforcement of any Court order

2 Taking action

What formal procedures are available for the company

As stated above there are several types of formal external administration procedures under theAustralian system

Receivership

9

This is the process by which a receiver and manager is appointed (usually by a secured creditor) toadminister a companyrsquos property that is the subject of the security granted to the secured creditor Theappointment of a receiver and manager is primarily governed by document granting the security withsome guidance from the Corporations Act

This process is usually used by a secured creditor to realise their secured property

Voluntary Administration

This process is designed to assist insolvent companies to satisfy their creditors and come to a formalarrangement with creditors to keep the company operating or enter liquidation

There are two stages in this process

(i) Voluntary Administration Stage

The voluntary administration stage is where an administrator is appointed (usually by resolution of thedirectors of the company) and within a short period of time the company assesses whether it can put acompromise proposal for creditors to vote on During this time an administrator is appointed to controlthe companyrsquos affairs The administrator will also convene two meetings of creditors where thecreditors will determine which is the best course of action to realise their interests

(ii) Creditors Resolution Stage

During this stage the creditors will elect one of three options for the company

a To enter the company into a Deed of Company Arrangement (DoCA)

This is a formal agreement between the company and its creditors (and third parties where applicable)to satisfy the company debts The arrangement is set out in terms and conditions and binds all securedand unsecured creditors to the extent the terms and conditions allow A DoCA is always preceded byvoluntary administration or

b To end the voluntary administration and return to normal trading or

c To wind up the company

Liquidation

This is the winding up of the companyrsquos financial affairs and bringing the corporate structure of thatcompany to an end A liquidator will undertake the liquidation process and distribute the companyrsquosassets to creditors A company can be placed into liquidation in three ways

(i) Memberrsquos voluntary winding up

(ii) Creditorrsquos voluntary winding up

(iii) Court order generally proceedings will be brought to the court by a creditor that has issued astatutory demand (discussed below)

What informal procedures are available for the company

The company is always able to deal directly with creditors and enter into payment arrangements so long

10

as it is not in external administration

It is very rare for this informal approach to be adopted as the same result can be achieved by the use ofvoluntary administration and a DoCA which binds all creditors

Which procedures are creditor-friendlydebtor-friendly

All options have benefits for both creditors and debtors The specific situation of the company will needto be considered in order to determine the most appropriate and beneficial option

What are the triggers for insolvency

The test for insolvency in Australia is based on the cash flow of the company

Under the Corporations Act a company is insolvent where the company is unable to pay all its debts asand when they become due and payable

When the court considers if a company is insolvent several factors will also be taken into accountincluding continuing losses overdue taxes poor relationship with present bankers including inability toborrow additional functions no access to alternative finance and creditors unpaid outside of tradingterms

What is the process for filing (Commencing winding up of a company)

As to the three types of external administration referred to above the processes for instigating themvary

(i) Receivership A secured creditor will issue a demand and execute an instrument of appointment of areceiver and manager

(ii) Memberrsquos voluntary winding up This is commenced by a resolution of shareholdersmembers thatthe company be wound up

The directors must declare that the company is solvent prior to the shareholdermembers being able tovote on the resolution to wind up the company

Note a resolution for winding up must be a special resolution this means that at least 75 of those whovote must be in favour of the resolution

(iii) Creditorrsquos voluntary winding up This is commenced by a resolution of shareholdersmembers thatthe company be wound up After this resolution is passed there is a meeting of the creditors where thecreditors may elect to appoint an alternative liquidator

(iv) Court ordered winding up Where a company has not complied with a valid statutory demand orother grounds for winding up exist an originating process may be filed in a State Supreme Court or aFederal Court followed by a Court hearing to determine whether the company should be wound up

Who can place the company into liquidation

Members Voluntary Winding up

The companyrsquos members may pass a special resolution in favour of winding up after there has been adeclaration of companyrsquos solvency by the directors

11

Except with the leave of the court a company may not wind itself up if there is already an applicationbefore the court to wind up the company the court has order that the company be wound up ininsolvency

Creditors Voluntary Winding Up

As described above for members voluntary winding up

Compulsory Winding Up

A person with standing may apply to the courts for a compulsory winding up Persons with standing mayinclude the Australian Securities and Investments Commission (ASIC) a director and a creditor of thecompany

If a voluntary winding up has started the court can still order a compulsory winding up

What is the extent of court involvement

Usually the courts involvement will not extend beyond applications for winding up (as describedabove) Sometimes however liquidators will utilise the Courts to

bull Examine directors and other persons associated with the company

bull Recover preferential payments and seek orders in relation to uncommercial transactions and the likeand

bull Recover debts owed by the companys debtors

How long will the insolvency process take

The length of the process depends on the company and the complexity of the winding up

What other steps such as notices are required

Notices generally

The Corporations Act and the Corporations Regulations 2001 prescribe the necessary notices to belodged with ASIC in connection with liquidation voluntary administration and receivership

Statutory demand

To start the process of a creditor seeking to wind up a company a creditor may serve a statutory demandon a company under the Corporations Act This must be formally served upon the company

The demand can be made in relation to a single or multiple debts that the company owes to the personthat are due and payable and total an amount greater than $2000

The debt amount must be specified in the demand and give the debtor at least 21 days from when thedemand is served to meet the debt

Where debt is not a judgment debt the debt must be accompanied by an affidavit verifying the amount ofthe debt and that the demand complies with the statutory rules

The effect of a failure to comply with the statutory demand is that the company is deemed to be unable to

12

pay its debts as and when they fall due and payable and therefore insolvent thereby giving the creditorgrounds to make an application to the Court to wind up the company

What rights does the company as debtor benefit from

This varies depending on the type of external administration

The debtor company benefits from a stay of executions and suspension of enforcement processes when itis wound up in insolvency

Is there anything resembling a debtor in possession process

No

Are there any local law red-flags particularly relevant to a situation

The PPSA affects priorities in security interests This is a new area of law in Australia and the way inwhich it will interact with insolvencies is unclear and yet to be tested in the courts This is somethingcreditors should be aware of in Australia

Are there any political factors which may come into play

No

3 Creditor issues

How are unsecured creditors affected

The effect on unsecured creditors depends on the type of external administration

If the company goes into external administration an unsecured creditor must wait for a dividend to bepaid in the order of priorities set out below It is rare for unsecured creditors to receive any significantdividend from a company in external administration

How might a secured creditor enforce its security

It may do so by appointing a receiver and manager (as set out above)

If a company is in voluntary administration a secured creditor will have 13 business days within whichthey may enforce their security If they do not exercise their security in this time they will be subject tothe moratorium that exists while a company is in voluntary administration

Will set-off apply and if so do any issues arise from this

Set off will apply where there is lsquomutualityrsquo of debts owed to and from the insolvent company Acompany that is both a debtor and creditor of the insolvent company will be entitled to set off thoseclaims against each other

Set off will not apply where one of the clawback provisions have been triggered

Set off will not apply where there is a lack of mutuality this includes with related companies

Creditors will not be able to rely on set off where at the time the company entered into the agreement

13

the creditor had knowledge that the company was insolvent

Are there prevailing inter-company debt issues

No Inter-company debts are treated in the same manner as all other debts

Is creditor recourse available in respect of any company affiliates

Holding companies may be liable for the insolvent trading of their subsidiaries

A holding company will contravene the act where it was the holding company of the subsidiary at thetime the debt was incurred the debt was incurred whilst the subsidiary was insolvent there werereasonable grounds to suspect that the subsidiary was insolvent or the incurring of that debt would causethe subsidiary to become insolvent the holding company or any of its directors were aware ofreasonable grounds to suspect that the subsidiary was insolvent having regard to the nature and extent ofthe corporations control over the subsidiaries affaires it was reasonable to suspect the holding companyor any of its directors ought to have been aware of the grounds for suspicion

Will a creditor committee be established and if so what is its role

In case of liquidation and voluntary administrations a committee of creditors may be established by aresolution of the creditors

4 Continuing the business

Who controls the company in a given procedure

The relevant external administrator (the receiver and manager liquidator or administrator)

How is the company financed (whilst in external administration)

The company is financed through its current assets

Is it possible to arrange DIP funding (or similar)

No DIP funding does not exist in Australia

How will proceedings affect employees and what rights do they benefit from

The claims of employees over their debts for wages and contributions are given priority under theCorporations Act for payment before certain other creditors are eligible to be paid

Where an employee has lost their job due to the redundancy or bankruptcy of their employer they maybe able to gain protection for their unpaid entitlements through the General Employees Entitlements ampRedundancy Scheme (GEERS) The employee must submit an application to claim this protection

How will proceedings affect contracts or other commercial arrangements entered into by the company

Most contracts or other commercial agreements contain provisions giving the other party the right toterminate the contact if the company goes into external administration

In addition liquidators have the right to disclaim onerous contracts

14

If neither of the above occurs the contract will theoretically continue

What is the method for the filing of claims

In order to receive a dividend from liquidation the creditor will need to submit to the liquidatorsufficient information to prove the debt

A proof of debt form will be sent to the creditor and will need to be completed and delivered to theliquidator

If the creditor is a company the proof of debt form must be signed by someone authorized by thecompany to sign that form

What is the timing for the filing of claims

Creditors must be allowed by the liquidator at least 14 daysrsquo notice before the deadline to prove thedebt This notice must be given to each person claiming to be a creditor whose debt or claim has notalready been admitted by the liquidator The notice must also be published in the daily newspapers inthe states where the company carried out business

How will claims rank

Secured creditors are able to ask the liquidator to deal with the secured assets on their behalf andaccount to them the proceeds and costs of collecting and selling those assets

Alternatively a secured creditor may appoint a receiver to take control and deal with some or all of thesecured assets

Thereafter claims generally rank as follows

(i) Costs and expenses of the liquidation including liquidators fees

(ii) Outstanding employee wages and superannuation

(iii) Outstanding employee leave of absence (including annual leave long service leave and sick leavewhere appropriate)

(iv) Employee retrenchment pay and

(v) Unsecured creditors

Each category is paid in full before the next category is paid If there are insufficient funds to pay acategory in full the available funds are paid on a pro rata basis and the remaining categories get nothing

Are there other complex issues arising by virtue of the insolvency for example an insolvency officer prescribed method for claimsfiling

No

5 Claims issues and procedures

Do cram-down procedures exist

15

No

6 Conclusion of insolvency procedure

How is the procedure formally concluded

The ending of the liquidation process may be brought about by deregistration of the company This hasthe effect of causing the company to no longer exist and as a consequence of this fact it can no longer besued

Alternatively an application can be brought before the court to have the liquidation brought to an end

What is the outlook for creditor classes

Unsecured creditors are very low in the order of classes that are paid out This often means that thereare not enough funds from the liquidation to satisfy the debts owed to those creditors

7 Alternative forms of restructuring

Are there non-formal procedures available to the company

There is a system of arrangements and restructures provided for in the Corporations Act Howeverhaving regard to the ease of voluntary administrations this alternative system is rarely used

Are there accelerated processes available

No

8 International Interaction

What international framework of rules applies to the company

Australia has ratified the Model Law on Cross-Border Insolvency through the Cross-Border InsolvencyAct 2008

What is the approach of the companyrsquos jurisdiction in respect of recognition of foreign proceedings

Australia applies the Model Law on Cross-Border Insolvency in relation to the recognition of foreignproceedings

16

Austria

Andreas Alzinger Partner Steven Roberts Attorney at Law Baier Rechtsanwaumllte OG

wwwbaierpartnerscom email alzingerbaierpartnerscom robertsbaierpartnerscom tel +43 1515 500



A creditor may take security by mortgaging or pledging the debtorrsquos assets by pledging the debtorrsquosreceivables or by agreement on reservation of title concerning the goods delivered to debtor

Transactions which were entered into when the debtor was already in financial difficulties mayhowever be challenged for certain reasons and within certain timeframes (see below)


Courts may upon application of the administrator and other creditors set aside certain transactions of aninsolvent debtor which have been entered into before the opening of the insolvency proceedings

(i) Within 2 years prior to insolvency Legal acts of the debtor which are

- to the disadvantage of its creditors if such acts are made with the intention of adversely affecting thecreditors and the other party is aware of that intention or

- made gratuitously unless made to fulfil a legal obligation

(ii) Within 1 year prior to insolvency Legal acts made in this timeframe by which a creditor receives asecurity or payment and which are made after the debtor is unable to pay its debts when due after itbecomes over-indebted or within 60 days before the opening of the insolvency

- if by this legal act a creditor receives a securitypayment in a way or at a time to which he was notentitled (unless this does not constitute a favourable treatment compared with all other creditors) or

- if by this legal act a creditor receives a securitypayment from the debtor who intended to treat thiscreditor favourably over other creditors and such creditor was or ought to have been aware of thedebtors intention

(iii) Within 6 months prior to insolvency If a debtor is unable to pay its debts when due is over-indebted or a petition for opening insolvency proceedings has been filed of which the creditor is orought to be aware of and

(iv) by a legal act such creditor receives securitya payment or

(v) a legal act is to the disadvantage of all other creditors

17


The general rule is that the directors of a company are required to file an application for insolvencywithin 60 days of the company formally becoming insolvent (triggers) In the event that the directors didnot file for insolvency without undue delay they risk being held liable to creditors A director mightfurthermore be liable to the company if transactions were performed after the company has becomeinsolvent or if trading was made in absence of proper consideration A director might as well be liableif he undertakes payments to shareholders while in distress thus causing insolvency

Further details

(i) Liability for tax and other duty payments

The Federal Duties Act (Bundesabgabenordnung ndash BAO) stipulates that the directors are obliged to takedue care that the relevant tax provisions are complied with and that especially any and all taxes andduties are timely paid In case of negligent violation the directors shall be jointly and severally liablefor such taxes and duties provided they can not successfully be claimed from the company

The liability starts with the appointment of the director and ends with the revocation or resignation ofthe director Upon appointment the director is required to investigate whether the company has compliedwith the relevant provisions of the law Should the director conclude that tax declarations or statementsmade by the company where incorrect or incomplete or not made at all the director is required to notifythe authorities of the circumstances within 3 months otherwise the director shall be liable for thedamage

The director shall not be liable for taxes and duties that become due following his revocation orresignation

The relevant provisions for liability are sect 9 sect 15 sect 80 BAO further sect 119 sect 120 sect 124 and sect 210BAO

The mandating of auditorstax advisers for the representation of the company vis-agrave-vis the fiscalauthorities does not exclude the liability of the directors as these are required to supervise control andauthorize the activities of the auditorstax advisers

(ii) Liability for contributions to the social insurance

The same liability as above (22) applies to the contributions toward the social insurance (portionwhich is deducted from the wages of the employees as well as the portion to be paid by the company) onthe basis of sect 67 ASVG Directors shall be liable only under the principals as described above(negligent conduct contributions cannot be recovered from the company)

(iii) Liability under the Austrian Business Reorganization Act (Unternehmensreorganisationsgesetz ndashURG)

The URG assumes that there is a requirement for reorganization if the

a equity ratio of the company is less than 8 (capital and reserves) and

b there is over 15 years debt redemption time

If the directors and or auditors fail to apply for a reorganization procedure (a formal procedure with acourt appointed reorganizer) and the company eventually goes bankrupt the directors shall be

18

personally liable to the company for debts that are not covered by the bankruptrsquos estate (as the assets ofthe company form the bankrupts estate which is used to satisfy the creditors this liability is in practiceto the benefit of the creditors) The liability is however limited with EUR 100000- per director

In practice auditors will warn the management about these crucial figures and will either advise to applyfor a reorganization procedure or state why to their opinion this is not necessary

2 Taking action


The new Insolvency Act (which replaced both the former Bankruptcy Act and the Composition Act)provides the following

(i) bankruptcy proceedings (Konkursverfahren) and

(ii) restructuring proceedings (Sanierungsverfahren) - with or without self-management of the estate bythe debtor

Restructuring proceedings (Sanierungsverfahren) with self-management (ldquomit Eigenverwaltungrdquo)require a restructuring plan providing for payment of at least 30 per cent of the debts within two yearsand need to be accepted by the majority of the creditors present at the court hearing

Restructuring proceedings (Sanierungsverfahren) without self-management (ldquoohne Eigenverwaltungrdquo)require a payment of at least 20 per cent of the debts The debtor may also offer a restructuring withinongoing bankruptcy proceedings however the debtor is not allowed to manage the assets which is thesole authority of the (insolvency-) administrator (ldquoInsolvenzverwalterrdquo)

Although it is not an insolvency procedure as such so called ldquoreorganisation proceedingsrdquo(ldquoReorganisationsverfahrenrdquo) continue to (theoretically) exist on the grounds of the Reorganisation ActTheir intention is to avoid insolvency proceedings Reorganisation proceedings are not mandatory andhave hardly any effects except in relation to personal liability of the directors of a company if it laterbecomes insolvent Reorganisation proceedings do not have much relevance as they are hardly everpractised

What informal procedures are available for the Company

Informal procedures do not exist A debtor can of course make arrangements with its creditors to sort itsdebts However no private arrangement may ever prevent any creditor from filing for insolvency orfrom enforcing binding rulings against the debtor


In principal insolvency proceedings are creditor-friendly because the purpose of such proceedings isthe collective satisfaction of the debtors creditors However there are possibilities for self-management and establishment of a restructuring plan (see above) which gives the debtor moreinfluence than in ldquotraditionalrdquo insolvency proceedings


Statutory requirements are that

19

(i) the debtor is incapable of meeting its financial obligations (cash flow test) or

(II) the debtor is over-indebted (balance sheet test)

What is the process for filing

Insolvency proceedings are initiated either by written application (to court) of one or more creditors orof the management of the insolvent company

The management is obliged to file for insolvency without undue delay if the statutory requirements aremet (see above) in any case not later than 60 days after the company becomes insolvent This 60 daymaximum period may be used by the management to take steps to reorganise the business of the debtor inorder to avoid insolvency If the management does not comply with these time limits it may becomeliable for damages resulting from the delay

Who can place the company into insolvency proceedings

A company may be placed into insolvency proceedings by a creditor or by the members of the board ofdirectors of the company

A creditors request is admissible if the creditor has a legal interest in the commencement of theinsolvency proceedings which is given if the claim is evidenced and the reason explained whyinsolvency proceedings should be commenced


Upon opening of insolvency proceedings the court will appoint an (insolvency) administrator(Insolvenzverwalter) who is in charge of the entire process with the debtor losing all rights to deal withits property

Only if the debtor when filing for insolvency applies for ldquorestructuring proceedingsrdquo(ldquoSanierungsverfahrenrdquo) and produces a restructuring plan offering 30 per cent payment within twoyears may the management of the estate remain with the debtor - ldquoself-managementrdquo (however undersupervision of an insolvency administrator appointed by court)


There is no given time frame It is not unlikely for insolvency proceedings of companies to take up to 3to 4 years or even longer depending on the size of the insolvent company the numbers of creditors andthe possibilities to find an investor for the insolvent company However a business will be carried onduring a reorganisation procedure for 1 to maximum 2 years until the reorganisation plan has beenaccepted


The insolvency court publishes the order commencing the insolvency proceedings immediately viainternet Furthermore the insolvency court sends a copy of the order commencing the insolvencyproceedings to the commercial register and to the public prosecutor

In the order commencing the insolvency proceedings the creditors will be requested to file their claimswith the insolvency administrator Furthermore the insolvency court calls for a creditors meeting


20

Upon the commencement of the insolvency proceedings the debtors right to manage and transfer theinsolvency estate will be vested in the insolvency administrator However the debtor in principle hasthe right that the business should be continued (unless there are substantial reasons for closing thebusiness) at least until the first report hearing which usually takes place about 2 months aftercommencement of insolvency proceedings During insolvency creditors principally may not execute intothe insolvency estate or into the debtors other property


In principle insolvency proceedings aim at satisfying the creditors as best as possible However thenew Insolvency Law does offer the possibility of self-management and a restructuring plan This mightresemble the debtor in possession process to some extent but even in this case the debtor is supervisedby an insolvency administrator appointed by the court However during a restructuring process theinsolvency administrator is not permitted to dispose of assets


No

3 Creditor issues


Unsecured creditors are only permitted to enforce their claims under the provisions governing theinsolvency proceedings The insolvency creditors must file their claims in writing with the insolvencyadministrator Unsecured creditors are usually satisfied at a low rate of their original receivables


Austrian insolvency law distinguishes between the following classes of creditors

(i) creditors with separation rights (Aussonderungsglaumlubiger) such as the owners of assets in thepossession of the debtor their assets are to be separated from the insolvency estate and transferred tothe owner

(ii) secured creditors (Absonderungsglaumlubiger) such as holders of pledges creditors with the benefitof mortgages over land buildings construction rights independent buildings or plant and machinerycreditors with a security assignment and creditors with a security interest over moveables Assetssubject to a security interest will be separated from the insolvency estate and will be realised separately(by the administrator) Each secured creditor may claim its right to such separation (subject to a 90 dayperiod)

(iii) preferential creditors (Masseglaumlubiger) such as the administrator and all creditors whose claimsaccrue after the opening of the insolvency proceedings

(iv) unsecured creditors (Insolvenzglaumlubiger) comprising those with claims against the debtor whichaccrued before or at the time of the opening of insolvency proceedings

(v) subordinated creditors (nachrangige Glaumlubiger) having claims which are subordinated by agreementor operation of law (eg certain loans of shareholders granted to the insolvent debtor before opening ofinsolvency proceedings) and

21

(vi) certain excluded creditors (ausgeschlossene Glaumlubiger) for example creditors having acquiredclaims on interest since the opening of the insolvency proceedings


If an insolvency creditor had a right to set off a claim on the date when the insolvency proceedings werecommenced such right remains unaffected by the proceedings In contrast set-off is prohibited if thecreditor for what reason ever acquired his claim or became itself a debtor to the insolvency estate afterthe commencement of the insolvency proceedings


Principally inter-company debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholder loans are subordinated In addition any repayments of shareholderloans within up to two years before filing for insolvency can be challenged by the insolvencyadministrator and therefore have to be paid back by the shareholders It is important to know that theseprovisions do not only apply to ldquorealrdquo shareholder loans but also to any claims of shareholders whichcould be qualified as loans from an economic perspective For example deferred claims for paymentresulting from supply of products could also be qualified as loan with the abovementionedconsequences


Missing any contractual agreements creditors cannot take recourse in respect of any companiesaffiliated with the debtor However creditors can take recourse from any personally liable shareholderof the debtor


All creditors are members of the creditors convention (Glaumlubigerversammlung) Generally the rights ofthe creditors convention are limited to being heard by and to submit petitions to the insolvency courtThe most relevant rights it exercises are to decide as to whether to accept restructuring proceedings(Sanierungsverfahren) without self- management (ohne Eigenverwaltung) during insolvency proceedingsand to propose members of the creditors committee (Glaumlubigerausschuss) It may also agree or object toa purchase of assets by members of the creditors committee

The insolvency court may appoint 3 to 7 persons who form the creditors committee which represents allcreditors if deemed necessary by the court or in case of an expected sale or lease of the debtorsbusiness The members may be creditors or not individuals or legal entities The committee has the rightto be heard on various issues and generally monitors and assists the administrator Of most relevanceare the committees rights to approve the sale of the debtors business and to release assets from theinsolvency estate (which both also require approval of the insolvency court)



In regular insolvency proceedings the company is controlled by the insolvency administrator

In self-management proceedings the company is controlled (managed) by the debtor however under thesupervision of the insolvency administrator

22

How is the company financed

In regular insolvency proceedings the company is financed by the insolvency estate and by receivablescollected by the insolvency administrator The insolvency administrator might in addition continuetransactions to earn money for the company or approach individual creditors for granting preferredloans

In self-management proceedings andor if the regular business is carried on this may in additioncontribute to the financing


There is principally no possibility to arrange DIP funding However receivables deriving fromtransactions entered into by the insolvency administrator or the self-managing debtor rank among otherdebts and have to be fully satisfied As a new creditor could expect full satisfaction of his receivableshe could be ready to fund the insolvent company Nevertheless this procedure is not similar to DIPfunding


The employment contracts remain in effect Termination is possible under the usual conditions as well asunder certain special termination conditions (eg merely statutory notice periods applicable and not anyindividually agreed longer notice periods) As far as the time period after commencement of theinsolvency proceedings is concerned the employeesrsquo wages have to be paid out of the insolvency estateWages that are not paid due to insolvency are in principle (upon application) reimbursed by a specialagency


If the contract has been performed by the debtor he is entitled to consideration If the contract has beenperformed by the creditor the creditor remains entitled to consideration He may however only enforcehis claims under the provisions governing the insolvency proceedings The creditor has to file his claimin writing with the insolvency administrator

If the contract has not or has not completely been performed by the debtor and the other party by the datewhen the insolvency proceedings were commenced the insolvency administrator may at his discretionrequest performance or termination If the insolvency administrator requests performance the other partyis entitled to consideration without limitations



The insolvency creditors must file their claims in writing with the insolvency administrator Such filingshould include copies of the documents evidencing the claim Usually the insolvency administratorsprovide standard forms for the filing


In the order commencing the insolvency proceedings the creditors will be required to file their claimswith the insolvency administrator within a definite period of time However claims filed after expiry of

23

the filing period will not be excluded from the proceedings The creditor will only have to bear the extracosts if any arising from the late filing


Principally all claims rank equal Some claims will be satisfied ranking below the other claims ofinsolvency creditors such as interests and penalties for late payment accruing the costs incurred byindividual insolvency creditors due to their participation in the proceedings fines regulatory finescoercive fines and administrative fines claims to the debtors gratuitous performance of considerationas well as claims for repayment of shareholdersrsquo loans

Insolvency creditors will only be satisfied after satisfaction of creditors entitled to separation (seeabove) after the satisfaction of creditors holding a contractual pledge a pledge acquired by attachmentor a legal lien in an asset forming part of the insolvency estate and after the remuneration of debtscreated by activities of the insolvency administrator


No



Regular insolvency proceedings serve the purpose of the liquidation of the debtors assets As soon asthe insolvency estate has been disposed of final distribution will take place As soon as finaldistribution has been carried out the insolvency court will decide on termination of the insolvencyproceedings

Particularly in order to maintain the enterprise an arrangement in an insolvency plan may be achievedAfter acceptance of the insolvency plan by the creditors the plan will be confirmed by the insolvencycourt As soon as confirmation of the insolvency plan has become binding the insolvency court willdecide on termination of the insolvency proceedings


It has to be distinguished between insolvency creditors and creditors to the insolvency estate

The claims of insolvency creditors already existed at the time of the insolvency proceedingrsquoscommencement They might expect to gain 2-10 of their receivables depending on the insolventcompany

Creditors to the insolvency estate are creditors who have made transactions with the insolvencyadministrator after the commencement of the insolvency proceedings These claims have to be paid inwhole by the insolvency administrator (unless he made an official reservation due to lack of funds priorto the transaction)


24


The debtor and its shareholders can take any legal and corporate action they deem feasible in order torestructure the company However the debtor is always obliged to file for insolvency in the event of astatutory requirement (ldquotrigger for insolvencyrdquo)


Simplified procedures do exist but for private individuals only (not available for companies)


What international framework of rules apply to the company

(i) The regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings

(ii) The Austrian Insolvency Act

(in addition various related provisions in other local laws)


Any judgment commencing insolvency proceedings handed down by a court of a Member State whichhas jurisdiction pursuant to EC regulation No 13462000 will be recognized in all the other MemberStates from the time that it becomes effective in the State of the commencement of proceedings

The commencement of foreign Non-EC insolvency proceedings will be recognized unless the courts ofthe state of the commencement of proceedings do not have jurisdiction in accordance with Austrian lawor where recognition leads to the result which is manifestly incompatible with major principles ofAustrian law in particular where it is incompatible with basic rights

25

Belgium

Nicholas Damman Partner LVP LAW

wwwlvplawbe email nicholasdammanlvplawbe tel +32 (0)3 2811120



A creditor may secure his claim in various ways

(i) seizure on the debtorrsquos assets

(ii) security interest on movable property in particular floating charges

(iii) security interest on real estate (mortgage)


Certain practices performed by the debtor between the time of cessation of payment and the bankruptcywill be regarded ldquosuspiciousrdquo This time frame can be no longer than six months prior to the declarationof bankruptcy

These suspicious practices will be declared not opposable to the bankrupt estate which means that thereceiver will leave them aside in the administration and the liquidation of the bankrupt estate

Amongst others the following practices are not opposable if they were performed since the date ofcessation of payment

(i) Payments of debts which did not fall due

(ii) Payments of debts which became due other than in cash or in negotiable instruments

(iii) Mortgages and pledges created by reason of debts previously incurred

Practices performed with fraudulent prejudice of the creditors are not opposable to the bankrupt estateirrespective of the date on which they took place


There is a specific directorrsquos liability in case of bankruptcy The directorsrsquo whose manifestly grossnegligence contributed to the bankruptcy of the company may be personally and jointly liable to theextent that the creditors are not fully satisfied with the proceeds

Furthermore company managers and directors may be held jointly and severally liable of the payment ofthe social security debts to the Belgian social security authorities if the bankruptcy of the company iscaused originally by a serious fault committed by managers or directors or if the directors and managers

26

have already been in the past implicated in a bankruptcy or winding up

Directorsrsquo liability may also be engaged in case of non-compliance with the so-called alarmproceedings (failure to convoke the general assembly in case of revealed losses)

2 Taking action


Bankruptcy covers the situation of substantial and long-term problems of solvency Bankruptcyproceedings are exclusively aimed at the liquidation of the estate of an insolvent debtor and thedistribution of the proceeds amongst his creditors

Judicial reorganization the purpose of these proceedings is to provide debtors who are in principleable to live up to their legal obligations but who have a temporary liquidity problem with the means toobtain a modification of their debts either by a reduction of these debts or by temporary refuge fromtheir creditors Basically there are three options available a settlement with all creditors or two oremore a collective settlement with all creditors via a reorganization plan a transfer of the enterprise inpart or as a whole under control of the court

Voluntary winding-up a company may decide to dissolve itself The decision of such voluntary winding-up is taken at the general assembly of shareholders who will appoint one or more liquidators


An agreement between the debtor and all (or a part of) his creditors may still take place outside thecontrol of the court ie through a settlement according to which the creditors agree with a temporarysuspension of the payments by the debtor or any other measure to effect the financial recovery of theenterprise Being essentially a contractual instrument the settlement has only a binding effect on thecreditors (unsecured andor secured) which agree with it


Taking into account the above as a general rule bankruptcy might be considered a rather creditor-friendly procedure and the judicial reorganization a rather debtor-friendly procedure


The debtor is considered to be bankrupt when he has permanently ceased to pay his debts and is nolonger able to obtain credit

An indication for insolvency may also be found in case

(i) one or more seizures have been levied on the debtorrsquos assets

(ii) one or more judgments in which the debtor has been condemned to pay have been rendered ondefault against a debtor

(iii) a writ of summons at request of the social security or the tax authorities has been served upon adebtor

27

(iv) the debtor failed to publish his annual account


Bankruptcy the debtor who has permanently ceased to pay his debts and is no longer able to obtaincredit is obliged to file for bankruptcy Bankruptcy proceedings may also be initiated by one or morecreditors the public prosecutor or the provisional administrator appointed by the court

Judicial reorganization the debtor files an application to the Court

Voluntary winding-up the initiative lies with the general assembly of the company


See answer 25


Bankruptcy the key person is the receiver who is appointed by the court The liquidation of a bankruptcompanyrsquos assets and the distribution of the proceeds amongst the creditors are executed by the receiverunder the control of either a supervisor appointed by the court or the court itself

Judicial reorganization the procedure is handled under the supervision of a delegate judge who informsthe court on the evolution of the debtorrsquos situation Furthermore the composition proposal which thedebtor is deemed to make is upon approval by the creditors subject to homologation by the court

Voluntary winding-up the nomination of the liquidator by the general assembly is subject to approval bythe court


Bankruptcy there is no rule with regard to the duration in practice bankruptcy proceedings may last upto 3 years or more

Judicial reorganization the moratorium (provisional suspension of payment for debts due at the time thatthe provisional suspension was granted) may take 6 months which may last up to 12 months as from thejudgment which declares the procedure open and even 18 months in exceptional circumstances


Bankruptcy the judgment of bankruptcy must be published in the Belgian State Gazette and in one ormore (local) newspapers The receiver must advise the creditors with a view to filing their claim musttake out a mortgage on the debtorrsquos real estate and verify the debtorrsquos accounts

Judicial reorganization the judgment which declares the procedure open must be published in theBelgian State Gazette The debtor must inform his creditors upon the amount of their claim and the asseton which a security has been provided


Bankruptcy the enforcement of all court decisions against the debtor is suspended and the creditors atleast the unsecured creditors and the creditors protected by a general privilege are no longer entitled toexercise their rights of enforcement against the debtor

28

Judicial reorganization the judgment which declares the procedure open has the following effectssuspension of any means of enforcement on mobile assets and real estate suspension of any declarationof bankruptcy or judicial dissolution prohibition on seizure it being understood that any seizure whichhas been levied prior to the opening of the procedure maintains its conservatory effects


To a certain extent the judicial reorganization may be resembling to a debtor in possession process


See answer 24 second bullet point


In case of a threatening bankruptcy regarding a big company involving the unemployment of a largenumber of employees the Belgian federal government or a regional government may take measures witha view to maintaining as much jobs as possible

3 Creditor issues


Bankruptcy as a result of the fixation principle and the distribution of the assets by the receiveraccording to the ldquopari passurdquo rule the unsecured debtors are no longer entitled to exercise their rights ofenforcement against the debtor as of the time of declaration of bankruptcy

Judicial reorganization the judgment which declares the procedure open affects the (un)securedcreditors (see answer 210 second bullet point) the reorganization plan once approved by the requiredpresence-and majority quorum is binding to the unsecured creditors


The rights of enforcement of the creditors with a specific privilege on movable assets in particular thecreditor with a floating charge are suspended until the closure of the first report of verification ofclaims In practice the receiver inquires with the creditor holding a floating charge whether the latteragrees that the assets be realized by the receiver In most cases the creditor with a floating charge agreeswith this course of action

When it comes to the creditors with a mortgage if no enforcement proceedings on the real estate havecommenced prior to the bankruptcy the receiver is solely entitled to realize the real estate This generalrule does not apply to the first mortgagee who is entitled to proceed to the realization after the firstreport of the verification of claims has been filed by the receiver In practice the receiver inquires withthe mortgagee(s) whether the latter agrees that the real estate be realized by the receiver In most casesthe mortgagee(s) agree(s) with this course of action


Set-off is only applicable when the following conditions are met the mutual claims are (i) certain (ii)liquid and (iii) payable at the time of set-off

After bankruptcy set-off is in principle not possible except when (i) all legal conditions for set-off are

29

met prior to the bankruptcy or (ii) even when all legal conditions for set-off are only met afterbankruptcy insofar it concerns mutual claims which result from the same legal ground or which areconnected ie arise from the same contract

Judicial reorganization during the moratorium set-off between (i) claims in the moratorium (ie claimswhich have arisen prior to the judgment opening the procedure or which result from the petition ordecisions made in the framework of the procedure) and (ii) claims which have arisen during themoratorium is only possible when the claims are connected


Blank


An affiliate company has a separate legal personality with the result that a creditor of a companynormally has no recourse against an affiliate except when a security fi letter of comfort has beenprovided by the affiliate


Bankruptcy when the liquidation of the bankrupt estate has been terminated the creditors vote on thestatement including the total amount of the assets the receiverrsquos fees and costs the debts of the estateand the repartition of the assets amongst the creditors as made by the receiver

Judicial reorganization the creditors vote on the reorganization plan The plan is considered approvedand is binding to all creditors including those who have voted against the plan when the majority of thecreditors present at the meeting which represent 50 of all claims approves it and subsequently thecourt homologates the plan



Bankruptcy the management is not entitled to dispose of the assets nor represent the company vis-agrave-visthird parties The receiver takes over the disposal of the assets and the representation of the companyvis-agrave-vis third parties albeit under control of a judicial supervisor and the court

Judicial reorganization the management is not set aside The court will however appoint a delegatejudge who will assist the debtor in the administration of his company


It will be difficult to borrow money from a bank and the company is unlikely to attract investors unless itis able to produce a credible reorganization plan or provide extra securities


New money may be provided by virtue of a new loan agreement or as new credit pursuant to an existingloan agreement

In case of judicial reorganization such lsquonew claimsrsquo are not submitted to the lsquoconcursus creditorumrsquo and

30

are considered debts of the estate when during the period of reorganization the debtor is declaredbankrupt or put into liquidation

Alternatively a subordinated loan ie a loan in terms of which the creditor waives his right to equaltreatment treatment by priority in case of concursus creditorum may be provided


Bankruptcy

(i) Bankruptcy does not result in automatic termination of employment agreements The receiver of thebankruptcy does have the right to terminate any employment agreement

(ii) Employment agreements which have not been confirmed within 15 days are deemed to have beenterminated

(iii) Employee claims for unpaid salaries are privileged

Judicial reorganization

(i) A judicial reorganization does not result in automatic termination of employment agreements nordoes the employer have the right to suspend any employment agreements during the reorganizationprocess

(ii) In case of a judicial reorganization by collective agreement the reorganization plan may provide ina reduction of salaries Personnel representatives are being heard prior to any decision being made

(iii) In the event of a transfer of the undertaking under judicial control the acquirer is not obliged toaccept the transfer of the entire workforce Instead he may choose how many he wants to take overEmployees that are thus being transferred keep their previous employment conditions unless they wouldhave been collectively renegotiated Individual negotiations are generally not permitted


The opening of bankruptcy proceedings does not automatically lead to the termination of the contractThe receiver can either decide to fulfill a contract or disclaim (unprofitable) contracts when he is not ina position to continue to trade and he cannot ensure that the insolvent party fulfills its obligations Thetwo main exceptions to this general rule are intuitu personae contracts which are considered to end bylaw in case of bankruptcy and the avoidance clause according to which the contract is automaticallyterminated in case of bankruptcy

The opening of a judicial reorganization does not affect current contracts they continue to exist Anycontractual clause which entitles either party to terminate the contract by reason of the other party filingan application for judicial reorganization or by reason of a judicial decision opening a judicialreorganization is void



Reference is made to paragraph 31 second point

31


Bankruptcy the time frame for the creditors to file their claim is maximum 1 year after the declaration ofbankruptcy


In general terms the creditors are paid in the following order

(iv) the new creditors or creditors of the estate

(v) the creditors with a specific security (floating charge mortgage)

(vi) the unsecured creditors


No



We understand a cram-down procedure to be the imposition by a court of a reorganization plan over theobjection of some categories of creditors In case of judicial reorganization the approval of thereorganization plan by the majority of the creditors present at the meeting who represent 50 of allclaims and the homologation of the plan by the court have binding effect to all creditors includingthose who have voted against the plan


See answer 36


See answer 53



See answer 22


There is a possibility of early terminating a bankruptcy proceeding when it is clear that there are noassets or the assets are insufficient to even cover up the costs of the administration and the liquidation ofthe estate

32



The Council Regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings situated in EUMember States is of interest (hereinafter the Regulation)

This Regulation grants a special position for the creditors who have a so-called right in rem on theassets of the debtor which are located in another Member State of the EU than the state where theinsolvency proceedings were opened Those rights in rem are governed by the lex rei sitae as anexception to the general rule of the lex concursus (the law of the state where the proceedings wereopened) The opening of insolvency proceedings shall not affect the rights in rem of creditors or thirdparties in respect of tangible or intangible moveable or immoveable assets belonging to the debtorwhich are situated within the territory of another Member State at the time of the opening ofproceedings which means that these creditors are entitled to enforce their securities without anyrestriction as if there was no insolvency procedure even if the legislation of the state where the assetsare located imposes such restrictions

When it comes to insolvency proceedings which do not fall under the Regulation ie insolvencyproceedings opened in a third state the national law including possible treaties remains relevant ThePrivate International Law of that third state will determine the scope of the insolvency proceedingsopened on its territory that is to say whether or not they produce extra territorial effects

Insofar Belgian Private International Law is applicable the Belgian insolvency procedure will normallyhave universal effects and will as a result cover all the assets of the debtor wherever these assets arelocated There is however no guarantee that a third state will recognize the extra-territorial effects ofthe Belgian insolvency The assets of the debtor in these third states will only be affected to the extentthat this state recognizes the powers of the Belgian receiver


Under the EU-Regulation any judgment opening main insolvency proceedings handed down by a court ofa Member State which has jurisdiction to that effect shall be recognized and shall produce the sameeffects without need for further formality in all the other Member States as of the time that it becomeseffective in the State of the opening of proceedings

When it comes to insolvency proceedings which do not fall under the Regulation Belgian PrivateInternational Law provides for the recognition by law of foreign bankruptcy proceedings

33

Brazil

Eduardo Boccuzzi Partner Alfeu Alves Pinto Partner Boccuzzi Advogados Associados

wwwboccuzzicombr email eduardoboccuzzicombr alfeuboccuzzicombr tel 55 1130395821 55 11 30395331



Usually when creditors contract with a company they require personal securities and securities in remIf those securities turn out to be insufficient the law usually allows creditors to demand theirreinforcement Article 333 II and III of the Civil Code determines the acceleration of obligations ifpersonal and in rem securities become insufficient and debtor refuses to reinforce them or in case assetswhich serve as in rem securities suffer seizure by another creditor Acceleration is also determined incase of perishing deterioration or depreciation of in rem securities (provided that debtor refuses toreinforce them) and in case they are expropriated by government (art 1425 I IV and V Civil Code) Inaddition article 477 of the Civil Code determines that if after the conclusion of a contract one of theparties enters into financial difficulties that might render doubtful the fulfillment of contractualobligations the other party may refuse to fulfill their contractual obligations until debtor fulfills his orprovides creditor with security


In addition to our comments to the previous question the Bankruptcy Law determines that transactionsentered into by a notoriously insolvent company are to be considered fraud against creditors and shallbe annulled (art 129) Furthermore alienation and encumbrance of assets when there is a pendingexecution which can lead the company into insolvency are considered fraud against execution and shallhave no effect (art 593 Code of Civil Procedure)


Directorsrsquo liabilities which may arise from a company trading while in distress will vary according tothe type of legal entity we are talking about In case of limited liability companies and corporationsadministrators as a rule are not personally responsible for obligations undertaken in the name of thecompany However they can be responsible if proven guilty or if acting in discordance with the law orthe articles of association (art 158 Law 64041976)

2 Taking action


Formal procedures established by Law 111012005 (ldquoBankruptcy Lawrdquo) are judicial reorganizationand bankruptcy


34

Law 111012005 also provides for an extrajudicial reorganization procedure which in spite of beingextrajudicial can hardly be defined as ldquoinformalrdquo Debtor who fulfills the requirements for judicialreorganization (see our answer to question 26 below) may negotiate a reorganization plan with theircreditors off court (art 161 Law 11101) However in order to be effective the plan has to beapproved by a judge (art 165 Law 11101)


Reorganization procedures are more debtor-friendly in the sense that they have the purpose of promotingsurpass of situations of economic-financial crisis in order to stimulate the economic activity by allowingthe maintenance of production sources employeesrsquo jobs and creditorsrsquo interest and by preserving thecompany and its social purpose (art 47 Law 11101) Bankruptcy procedure on the other hand is morecreditor-friendly and aggressive for the debtor in the sense that debtor is dismissed from his activities(art 75 Law 11101) and all its obligations are accelerated (art 77 Law 11101)


According to art 94 Law 11101 insolvency is triggered by either one of the following events (i)failure by the debtor to pay without relevant reason liquid debt materialized in protested titles orexecutive titles which together surpass the amount of 40 minimum wages (aprox R$ 28960) at the timebankruptcy has been filed (ii) failure by the debtor executed for any liquid amount to pay deposit ornominate to constriction sufficient assets within legal term (iii) practice by debtor of any of thefollowing acts except if within reorganization procedure (a) to anticipate liquidation of its assets ormake payments through ruinous or fraudulent means (b) to practice or try to practice simulatedoperations or to alienate all or part of its assets to third parties creditor or not with the objective todelay payments or fraud creditors (c) to transfer establishment to third party creditor or not without theconsent of all creditors and without remaining with sufficient assets to solve its liabilities (d) tosimulate transfer of its main establishment with the objective to evade legislation or inspection or inorder to damage creditor (e) to give or reinforce guarantees to creditors regarding debts previouslyundertaken without staying with enough assets to pay off its liabilities (f) to absent without leavingrepresentatives and with enough assets to pay creditors or to abandon the establishment or try to hidefrom its domicile headquarter or main establishment g) to refrain from fulfilling on the establishedterm obligation undertaken under the judicial reorganization plan


In order to file for judicial reorganization debtor shall present the following documents (art 51 Law11101) (i) a description of the concrete causes of its economic situation and the reasons for theeconomic-financial crisis (ii) balance sheets of the last three years (iii) complete list of creditors andfull data about the credits (amount maturity date etc) (iv) complete list and data about employees(function salaries etc) (v) regularity certificate from the Commercial Registry articles ofincorporation and acts of appointment of current administrators (vi) a list of private assets of itscontrolling shareholders and administrators (vii) current bank statements and financial applications(viii) certificates of protest registries in the jurisdiction where it is headquartered or domiciled or inwhich it has subsidiaries (ix) a signed list of all judicial claims in which it figures as party includinglabor claims with an estimate of the respecting values that are being claimed


Bankruptcy can be filed by (art 97 Law 11101) (i) the debtor (ii) his surviving spouse any heir of thedebtor or executrix (iii) quotaholder or shareholder of the debtor according to law or companyrsquosarticles of incorporation (iv) any creditor As for judicial reorganization it can be filed by the debtorwho exercises regularly its activities for more than 2 years and that has all of the following requirements

35

(art 48 Law 11101) (i) is not bankrupt or if was in the past all responsibilities thereof have beendeclared extinct by unappealable sentence (ii) has not obtained judicial reorganization concession inless than 5 years (iii) has not obtained in less than 5 years concession of judicial reorganization basedon special reorganization plan for small companies established in Section V of Law 11101 and (iv) hasnot been condemned or have as administrator or controlling partner a person condemned for any of thebankruptcy crimes established in Law 11101 Judicial reorganization can also be filed by survivingspouse debtorrsquos heirs executrix or remaining partner


Court involvement is very extensive in all three insolvency procedures established by Law 11101bankruptcy judicial reorganization and extrajudicial reorganization As we have seen in item 22 eventhe extrajudicial reorganization which in theory is ldquoextrajudicialrdquo in fact is only effective if approvedby the court The law requires constant court surveillance over the insolvency procedures For examplethe administrator in judicial reorganization has to present in court a monthly report on debtorsrsquo activities(art 22IIc Law 11101) Furthermore the importance of court involvement is so strong that it is usualin major cities in Brazil to have specialized courts which only deal with insolvency


In case of judicial reorganization the law establishes that it lasts for 2 years (art 61 Law 11101)However it is possible that in virtue of the reorganization debtor has to assume obligations which canlast for much longer periods In case of Bankruptcy a timeframe is virtually unpredictable Bankruptcyprocedures are usually very lengthy and hardly take less than 10 years to be concluded


As we will detail hereunder both in judicial reorganization and in Bankruptcy the judge shall determinethe publication of an announcement after which creditors shall have 15 days to present their claims orfile divergences (art 7th sect1st Law 11101) After 45 days a new announcement with a new list ofcreditors shall be published (art 7th sect 2nd Law 11101) As this new list may suffer opposition fromthe debtor its shareholders or the District Attorney (art 8th and 13 to 15 Lei 11101) a new general listof creditors approved by the judge shall be published five days after the oppositions have been decided(art 18 Law 11101)


Debtors under judicial reorganization or bankruptcy benefit from the suspension of all legal claims andexecutions with the exception fiscal executions labor claims and demands on uncertain values (art 6th52 III and 99 III Law 11101) Under judicial reorganization debtor benefits from dismissal frompresenting clearance certificates in order to exercise all of its activities except when contracting withthe government or in order to receive fiscal benefits or incentives (art 52 II Law 11101) Debtors mayalso benefit according to the case from (i) new maturity dates and special payment conditions formatured or maturing obligations (ii) individual or collective bargaining agreements which can reduceemployeersquos salaries working hours and compensation (iii) giving in payment or novation of debts (iv)partial sale of assets (v) equalization of financial expenses related to debts of any nature Underbankruptcy on the other hand debtors have the rights (i) to monitor the administration of bankruptcy(ii) to require necessary measures for the conservation of his rights or of the collective assets and (iii)to intervene in the processes in which the bankruptrsquos estate is party or interested requiring whichever islawful and lodging applicable appeals (art 103 sole paragraph Law 11101)


36

Among Brazilian insolvency procedures the closest that resembles a possession process is thepossibility of the owner of an asset which is in power of the debtor to demand its restitution ifBankruptcy is declared (art 85 Law 11101)


Local particularities and red-flags have been addressed in our comments to the other questions


Judicial reorganization has the purpose of promoting the surpass of situations of economic-financialcrisis It seizes to stimulate the economic activity by allowing the maintenance of production sourcesemployeesrsquo jobs and creditorsrsquo interest and by preserving the company and its social purpose (art 47 ofLaw 11101) This means that in order to decide for the application of reorganization instead ofbankruptcy judges may be politically affected by these purposes In practice one can envisage a strongtendency among judges to avoid bankruptcy in order to preserve employeesrsquo jobs

3 Creditor issues


As we will see below unsecured creditors will only be able to receive after creditors who havepreference according to the rank of claims reproduced thereof have been paid


As we will see below in rem secured creditors will only be able to enforce their securities after thecreditors who have preference over them according to the rank of claims reproduced thereof have beenpaid


Yes Set-off applies with preference over all other creditors to debtorsrsquo debts which have matured untilthe date Bankruptcy is declared whether they have matured in virtue of the Bankruptcy sentence or notSet-off will not apply (i) to credits transferred after the declaration of Bankruptcy (except in case ofmerger acquisition spin-off or death) or (ii) to credits which have matured before Bankruptcy isdeclared but have been transferred maliciously or simply because the economic-financial crisissituation of the debtor was already known (art 122 Law 11101)


Not really The rank of claims (art 83 Law 11101) is not affected when it comes to companies whichare part of the same corporate group What matters is the nature of the credit and not the existentcorporate bond (subsidiaryaffiliate etc) between creditor and debtor


Law 11101 does not discipline explicitly any sort of resource available in respect of companyaffiliates Nonetheless as long as creditors agree something in this direction may be created in theory inthe judicial reorganization plan


37

A creditor committee is optional according to Brazilian law It can be constituted by deliberation of anyof creditorsrsquo classes (art 26 Law 11101) In the absence of a creditor committee its attributions shallbe executed by the judicial administrator and in case of incompatibility by the judge The creditorcommittee shall have the following main attributions (art 27 Law 11101) both in judicialreorganization and in bankruptcy (i) to supervise activities and accounts of the judicial administrator(ii) to ensure the good progress of the procedure and the enforcement of law (iii) to notify the judge incase of violation of rights or injury to creditorsrsquo interests (iv) to investigate or give advice on anyclaims from interested parties (v) to require before the judge the summoning of a creditorsrsquo generalassembly (vi) to speak out in the cases established by the law Specifically in judicial reorganizationthe committee has the following attributions (i) to supervise the administration of debtorrsquos activitiespresenting every 30 days report on its situation (ii) to supervise the enforcement of the judicialreorganization plan and (iii) to require before the judge authorization for the sale of fixed assets



Although control change of the company may be a measure taken in order to promote its judicialreorganization (art 50 III Law 11101) as a rule debtorrsquos corporate structure remains the same


During judicial reorganization the company can obtain new loans These new creditors will precedethose established in art 84 Law 11101 (see our comments above) when it comes to receiving from thedebtor (art 67 and art 83 V Law 11101)


Law 11101 does not establish any limitation to this However if this funding arises after judicialreorganization has begun it has to be approved by creditors


Employees are the first creditors to receive in case of bankruptcy (art 83 Law 11101) In case ofjudicial reorganization the reorganization plan can not determine a term superior to 1 year for thepayment of credits deriving from labor legislation or labor accidents which had matured before thereorganization has been filed (Law 11101 in its art 54) The plan also can not envisage a term superiorto 30 days for the payment of credits regarding salaries matured up to 3 months before reorganizationhas been filed up to the limit of 5 minimum wages per employee (R$ 3620)


The declaration of Bankruptcy determines the acceleration of all debtorsrsquo debts (Art 77 Law 11101)On the contrary extrajudicial reorganization plan can not determine the acceleration of debts (art 161sect2ordm Law 11101) As for the filing for judicial reorganization in spite of the omission in the law inpractice the majority of the agreements establish acceleration clauses


38


See answer to the next question


After the filing for the judicial reorganization (art 52 sect1st Law 11101) or the sentence in thebankruptcy procedure (art 99 sole paragraph Law 11101) the judge shall determine the publication ofan announcement after which creditors shall have 15 days to present their claims or file divergencesregarding the credits that have been listed in the announcement (art 7th sect1st Law 11101 After that thecompanyrsquos appointed administrator shall have 45 days to analyze the new claims and divergences andpublish a new announcement with a new list of creditors (art 7th sect 2nd Law 11101) The debtor itsshareholders and the District Attorney may oppose to this new list of creditors (art 8th and 13 to 15 Lei11101) In any case five days after the oppositions have been decided a general list of creditorsapproved by the judge shall be published (art 18 Law 11101)


According to art 83 Law 11101 the rank of claims is as follows (i) credits arising from laborlegislation limited to 150 minimum wages by creditor (currently R$ 108600) and those arising fromlabor accidents (ii) in rem secured credits up to the limit of the encumbered assets (iii) tax creditsregardless of their nature and date of constitution with the exception of tax fines (iv) credits withspecial privileges as established by applicable law (notably art 964 of the Civil Code) (v) credits withgeneral privileges such as those arising from goods and services which continue to be providedregularly during the period of judicial reorganization in any case limited to the value of the goods andservices rendered during the reorganization period (art 67 sole paragraph Law 11101) and othersestablished by applicable law (notably art 965 of the Civil Code) (vi) unsecured credits such as theoverbalance of credits not covered by in rem securities and the overbalance of credits arising fromlabor legislation which exceed the limit of 150 minimum wages (vii) contractual fines and otherpenalties for the infraction of criminal or administrative laws including tax legislation (viii)subordinated credits such as those established by law or contract and those regarding payment ofshareholders or directors who are not employees Furthermore previously to the payment of all debtsmentioned above the following amounts are due (art 84 Law 11101) (i) payment of the appointedjudicial administrator and his assistants (ii) credits arising from labor legislation or from laboraccidents regarding services rendered after bankruptcy has been declared (iii) amounts rendered bycreditors to the bankruptcy estate (iv) expenses with collection administration realization of assets anddistribution of products as well as expenses with the bankruptcy procedure (v) judicial expensesregarding claims and executions in which the bankruptcy estate has been defeated (vi) obligationsresulting from judicial acts validly practiced during the judicial reorganization or after the declarationof bankruptcy and (vii) taxes regarding taxable events which occurred after the declaration ofbankruptcy


Complex issues arising by virtue of the insolvency have been already addressed in our comments to theother questions



39

Yes According to art 58 Law 11101 court may grant judicial reorganization based on a plan that hasnot been approved by creditors pursuant to the law as long as it has obtained in the same creditorsrsquomeeting (i) favourable vote of creditors which represent more than half of the value of all creditspresent at the meeting regardless of their classes (ii) the approval of two classes of creditors or incase of only two classes with voting creditors the approval by at least one of them (iii) favourable voteof more than 13 of creditors in the class that rejected the reorganization plan and (iv) lack ofimposition by the plan of different treatment between creditors of the class that rejected the plan


Judicial reorganization is formally concluded with a sentence which is rendered after the fulfillment ofall obligations which mature up to two years after reorganization has been granted (arts 63 and 61 Law11101) Bankruptcy is also formally concluded with a sentence (art 156 Law 11101) which will takeplace after the distribution of debtorsrsquo assets among creditors (art 154 Law 11101) and thepresentation of a final report which shall indicate all payments that were made specifying the remainingresponsibilities (art 155 Law 11101)


In a rough way we can say the lower a credit class is placed in the rank of claims (arts 83 and 84 Law11101) the gloomier is the chance of the creditor being paid One must remember that if a company isfacing bankruptcy its capacity to pay its debts is inferior to the amount of debts it has Therefore inpractice chances that low-ranked creditors such as unsecured creditors end up not receiving theirpayments are very considerable



As per our answer to question 22 Law 111012005 provides for an extrajudicial reorganizationprocedure which is less formal than judicial reorganization Extrajudicial reorganization is a procedurebased on free negotiation of a reorganization plan between debtor and creditors (art 161 Law 11101)However it can hardly be regarded as ldquonon-formalrdquo or even ldquoextrajudicialrdquo since it has to beapproved in court in order to be effective (art 165 Law 11101)


Law 11101 provides for an abbreviated and simpler procedure of judicial reorganization for smallcompanies According to this procedure a creditorsrsquo meeting is not summoned and the judge will grantthe judicial reorganization automatically if the applicable requirements are fulfilled Claims andexecutions as well as prescription regarding credits which are not part of the reorganization plan arenot suspended The requirements are the following (i) the reorganization plan shall include onlyunsecured credits (ii) the credits shall be paid in monthly installments (up to 36) adjusted for inflationplus 12 per year interest rate (iii) the first installment shall be paid up to 180 days after filing and(iv) the increase of expenses and hiring of employees has to be authorized by the judge



40

Unlike in other countries where cross-border insolvency is considerably developed regulation inBrazil is almost completely territorial A formally (though not practically) applicable set of rules isestablished by the ancient Code of International Private Law also known as Code Bustamante (1928)which was enacted in Brazil by Decree-Law 188711929 With respect to insolvency some rulesapplying to its Latin American signatory countries regard for instance the effectiveness andenforceability of bankruptcy sentences (art 417) and recognition of foreign administrators (art 418)However albeit still formally in effect in Brazil the Code Bustamante is seldom invoked and appliedby court


Theoretically speaking recognition and enforceability of foreign decisions in insolvency proceedings ispossible However this option is not very attractive to foreign creditors which prefer to claim theircredits directly before the local Brazilian courts thus avoiding a probably lengthy and uncertainoutcome of the recognition process with the Superior Court of Justice (STJ) In addition the applicationfor the recognition and enforceability of foreign insolvency decisions could be particularly harmful tothe debtorrsquos interests as he would have no protection until the foreign insolvency decision isrecognized In practice therefore local subsidiaries of foreign groups who are in trouble will usuallyfile for protection individually directly with the Brazilian courts This means that the Brazilian courtswill have jurisdiction over the assets of this subsidiary and will apply Brazilian law to the insolvencyproceedings In this case probably no foreign insolvency proceeding will effectively interfere with it Afamous example of this is the Parmalat case in which the Brazilian subsidiary Parmalat SA Induacutestriade Alimentos has filed for reorganization in Brazil despite of the fact that there was already aninsolvency procedure regarding Parmalat SpA taking place in Italy

41

Canadaincluding Quebec specific variations

Richard R Wozenilek Partner Keel Cottrelle LLP

wwwkeelcottrellecom email rwozenilekkeelcottrelleonca tel +1(416) 367-7690

Me Jean-Franccedilois Leacutepine Partner LAMARRE-LINTEAU amp MONTCALM

wwwlllmqcca email jflepinelllmqcca tel +1 (514) 396-6497



A creditor may take a security interest by way of a charge mortgage lien pledge or any other form ofagreement which evidences the granting of a security interest The following are required in order tocreate a valid security interest value must have been given the debtor must have had rights in thecollateral and the debtor must have entered into a security agreement In general Canadian law does notfocus on the different forms of security interests (ie pledge mortgage or charge) Instead the legalfocus is on whether the creditor perfected its validly attached security interest by way of registrationor possession Perfected secured creditors will have priority over unperfected security interestsAlthough a security interest need not be perfected in order to be effective upon the debtor beingadjudged bankrupt an unperfected secured creditors rights will be equivalent to those of the debtorsgeneral creditors

Security interests over personal property and real property are regulated by provincial legislationHowever Canadian chartered banks may also obtain a special form of security interest over certainforms of property under the federal Bank Act

In Queacutebec a creditor may take security over assets by way of a conventional hypothec


Trustees in bankruptcy and in some cases creditors are afforded several remedies for the review ofpre-bankruptcy transactions Generally these remedies can be categorized in regards to

(i) transactions unfairly preferring one creditor over another

(ii) transactions for consideration conspicuously below fair market value

(iii) transactions made with the intent to defeat hinder delay or defraud creditors including bulk sales

In addition in some circumstances trustees and creditors may turn to various corporate remedies

42

available under federal and provincial legislation to obtain relief from the fraudulent behaviour of adebtor

In Queacutebec if the transaction is made in fraud of the companyrsquos creditors in particular where the debtorrenders or seeks to render himself insolvent or by which being insolvent he grants preference toanother creditor the transaction is vulnerable to attack This provincial remedy roughly equivalent tothe remedy provided in the Fraudulent Conveyances Acts is called Paulian action and is available to thetrustee


Corporate legislation in Canada both federally and provincially places fiduciary obligations and dutiesupon the directors of a corporation Generally speaking these fiduciary obligations require everydirector to act honestly and in good faith with a view to the best interests of the corporation and toexercise the care diligence and skill that a reasonably prudent person would exercise in comparablecircumstances Directors and officers owe their fiduciary duty of loyalty to the corporation not to itsshareholders or creditors even where the corporation is in the shadow of insolvency However incontrast to their fiduciary obligation when a company is insolvent or in financial distress a director orofficer may owe a duty of care to a variety of new stakeholders including the companys creditors whomight pursue an oppression or derivative claim against the directors

In addition to the duties noted above directors can also face various statutory liabilities For exampledirectors can be liable for improper distributions and a certain portion of unremitted taxes unpaidemployee wages and vacation pay

In Quebec directors might be held liable to creditors in respect of either contractual or extra-contractual obligations Contractual liability arises where the director personally guarantees acontractual obligation of the company Liability also arises where the director personally acts in amanner that triggers his or her extra-contractual liability If breach of the standard of care causation anddamages are established creditors can resort to extra-contractual liability to have their rightsvindicated Directors and officers will not be held to be in breach of the duty of care if they actprudently and on a reasonably informed basis The decisions they make must be reasonable businessdecisions in light of all the circumstances about which the directors or officers knew or ought to haveknown

2 Taking action


Once insolvent a debtor may initiate several different actions designed to protect itself while it attemptsto reorganize its affairs

Companies Creditors Arrangement Act (ldquoCCAArdquo) - a debtor corporation may seek court protectionfrom its creditors while reorganizing its affairs under the federal CCAA The qualifying debtor

43

corporation may bring an application to the court for an order directing a stay of proceedings against itwhile it formulates a plan of compromise or arrangement between itself and its creditors In general thedebtor seeking such protection must meet several requirements including

(i) be an entity falling within the CCAAs definition of a company

(ii) if the company is an incorporated entity not constituted under any Canadian federal or provinciallaw the debtor must have assets or do business in Canada

(iii) be insolvent or bankrupt and

(iv) have debts of at least $5000000 CAN

Bankruptcy and Insolvency Act (ldquoBIArdquo) - the insolvent debtor may also avail itself of the provisions ofthe federal BIA dealing with proposals made to unsecured creditors The reorganization sections of theBIA are designed to permit an insolvent debtor to make a proposal to its creditors for the compromise ofits debts to them upon acceptable terms and thereby avoid bankruptcy During a proposal-basedreorganization the debtor remains in operational control of its assets and liabilities and remains vestedwith them The proposal is a contract that if duly filed and accepted by the requisite majorities ofcreditors and ratified by the court binds the debtor and its affected creditors to the terms thereof(assuming its preconditions if any are fulfilled) However since the BIA does not bind or affectsecured creditors such a proposal cannot bind or affect the rights of secured creditors which isregulated by provincial legislation As a results the co-operation of secured creditors to a proposalmust be obtained independently If the proposal is rejected by the debtors creditors then the debtor isdeemed to have made an assignment in bankruptcy and formal receivership proceedings may commence


The debtors decision to undertake a formal restructuring will generally come as a last resort after otheroptions have failed Often the debtor will seek other solutions such as the injection of new capital andinformal debt arrangements with its creditors If all the creditors agree on the debtors settlement termsthe threat of formal insolvency proceedings can be avoided If such other avenues are not feasible thenthe debtor will be faced with the possible liquidation of its assets


As the primary purpose of all proceedings is to balance the interests of a debtor with those of itscreditors none of the procedures grants any particular advantage to the creditor or the debtor It isimportant to note that while the Companies Creditors Arrangement Act is focused on the restructuringrather than the liquidation of a company a plan of compromise or arrangement proposed pursuant to theCCAA must still be approved by the companies creditors and the court


One or more creditors may file an application for a bankruptcy order if the debt owing to the applicantcreditor amounts to at least $1000 and the debtor has committed an act of bankruptcy within six monthspreceding the filing of the application There are ten different ldquoacts of bankruptcyrdquo enumerated in theBankruptcy and Insolvency Act Most of these acts of bankruptcy are rarely used The acts of bankruptcymost commonly relied on are the following the debtor has ceased to meet its liabilities generally as theybecome due the debtor has permitted an execution or other process under which the debtors propertycould be seized or taken in execution to remain unsatisfied for certain specific time limits and thedebtor has made a fraudulent conveyance gift or transfer of property in Canada or elsewhere

44


In order to initiate an involuntary bankruptcy one or more creditors may bring an application for abankruptcy order against a debtor by filing the application in the court having jurisdiction in the judicialdistrict of the locality of the debtor The applicant must also serve the application on the debtor andhaving the application heard in the court The applicant bears the onus of showing that the applicationhas been made in the proper jurisdiction ldquoLocality of a debtorrdquo means the principal place where thedebtor has carried on business during the year immediately preceding bankruptcy where the debtor hasresided during that year or in cases not meeting these requirements where the greater part of thedebtors property is situated

A voluntary bankruptcy does not require court proceedings and involves a debtor assigning its propertyto a licensed trustee in bankruptcy in the form of a simple assignment document


The courts involvement in an involuntary bankruptcy can be quite high For example in a proceedingunder the Bankruptcy and Insolvency Act the court will hold a hearing regarding the bankruptcy petitionand will require proof of the facts alleged in the petition The proof initially is by affidavit but if thedebtor disputes the petition there will be a trial as to whether the debtor should be adjudged bankrupt Ifthe court is satisfied it may make a receiving order and appoint a trustee in bankruptcy nominated by thepetitioning creditors

The court is also highly involved in regards to plans under the Companies Creditors Arrangement ActThe court retains discretion over whether to order a creditors meeting and may refuse to make such anorder - and thereby effectively refuse to allow the debtor to put its CCAA plan to a vote - if itdetermines that the creditors best interests would not be served Furthermore even if the creditorsapprove the debtorrsquos plan by the requisite majority the court still retains discretion over whether tosanction the terms of the plan


The length of a bankruptcy proceeding in Canada varies depending on the circumstance Somebankruptcies might take less than a year while more complicated major bankruptcies often take longer Abankrupt company cannot apply for a discharge from bankruptcy until it has satisfied the claims of itscreditors in full In comparison an individual bankrupt may apply for automatic discharge frombankruptcy as early as nine months after becoming adjudged bankrupt


An application for a bankruptcy order must be signed by the registrar and the application materials mustbe served on the debtor at least 10 days prior to the bankruptcy hearing An affidavit proving service ofthe application materials must be filed with the court at least two days before the date set for thehearing Furthermore within five days of being appointed the trustee in bankruptcy is required topublish notice of the bankruptcy and the first meeting of creditors in a local newspaper


The major benefit of pursuing the restructuring mechanisms available under the Companiesrsquo CreditorsArrangement Act or the Bankruptcy and Insolvency Act is that all legal proceedings against the debtorwill be stayed in order to give the debtor breathing room to continue its affairs while restructuring itsdebts Furthermore once a plan or proposal is approved the parties will be bound by its terms and thedebtorrsquos bankruptcy will be annulled by the court (unless the debtor fails to fulfill its obligations under

45

the plan or arrangement)


The restructuring mechanisms available under both the Companiesrsquo Creditors Arrangement Act and theBankruptcy and Insolvency Act are somewhat functionally equivalent to US Chapter 11 debtor inpossession process For example like the US Chapter 11 process both the CCAA and BIA allow for abroad stay of legal proceedings preventing creditors from taking any action against the debtor companyThey also impose a general moratorium on the payment of debt existing at the date the debtor filed forprotection in order to allow the debtor to develop a plan or proposal with its creditors Debtors utilizingthese processes can also be authorized to sell their assets through a court-supervised process and mayalso obtain DIP financing Furthermore the debtor will remain in possession and control of the companyduring both of these restructuring processes as long as it fulfills its obligations under its approvedrestructuring plan or proposal


Although the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act are federalstatutes enacted by the Parliament of Canada it is important to remember that pursuant to theConstitution of Canada the rights of secured creditors are governed by the individual provincesTherefore during any insolvency proceedings it is essential to review the applicable provinciallegislation in order to determine how the rights of secured creditors might affect the process Forexample the following are some of the statutes one would need to review in order to determine therights of secured creditors in Ontario

(i) Personal Property Security Act RSO 1990 c P 10

(ii) Repair and Storage Liens Act RSO 1990 c R 25

(iii) Mortgages Act RSO 1990 C m 40

In Queacutebec the following are the some of the securities one would need to review in order to determinethe rights of secured creditors (i) Security trusts Art 1261 Queacutebec Civil Code (ldquoQCCrdquo) (ii) Rightsof retention Art 1592 QCC (iii) Suretyship Art 2333 QCC (iv) Prior claims of municipalitiesand school boards constituting real rights Art 26541 QCC (v) Hypothecs on moveable andimmovable property Art 2660 QCC (vi) Claims of persons having taken part in the construction orrenovation of an immovable Art 2724 QCC (vii) Ownership securities Art 1745 (Instalment sales)1750 (Sales with right of retention) 1842 (Leasing) Despite the current convergence between Queacutebecand the remaining provinces towards functionalism Quebecrsquos official focus is still form Queacutebecrsquoscollaterals specifically involve the granting of a real right that will follow the pledged asset inwhoeverrsquos hands it may be Publication which is the equivalent of perfection determines rank Someownership securities such as leasing and claims assignments in true ownership (factoring agreements)require no registration to be validly set up


There are no major political issues other than the ordinary public or media concerns that come with anybankruptcy proceeding

In Queacutebec several publically-owned corporations have a key-role in the economic reality of QueacutebecThese publically owned corporations will often be driven by policy concerns

46

3 Creditor issuesHow are unsecured creditors affected

Once a debtor is adjudge bankrupt it no longer has to make debt payments directly to unsecuredcreditors as they are then represented by the trustee in bankruptcy Furthermore any court proceedingsthat have already been commenced by an unsecured creditor may not be continued without leave of thecourt During formal bankruptcy proceedings unsecured creditors have no proprietary claim against thebankrupts assets but are entitled to share in the trustees distribution of the proceeds realized from thebankrupts assets In addition to the right to receive distributions from the bankrupts estate unsecuredcreditors may participate in the governance of the estate by voting at meetings of creditors for exampleto elect inspectors who guide the trustee in the performance of its duties A secured creditor may also bean unsecured creditor and participate in distributions and estate governance in the same way as otherunsecured creditors to the extent that the value of the secured creditors collateral is insufficient tosatisfy its creditor claim


A secured creditor would enforce its security in the same way as if the debtor was not bankrupt Thetwo main remedies available to the secured creditor are power of sale proceedings and foreclosureactions Essentially power of sale proceedings allow the secured creditor after providing notice ofdefault to the debtor and other creditors to seize and sell the collateral and apply the proceeds of suchsale to the debt owing Secured creditors have the right to enforce their security for the full amount of thedebt If the value of the debt exceeds the proceeds realized from the seizure and sale of the collateralthe secured creditor will rank as an unsecured creditor for the balance In enforcing its security thesecured creditor must take reasonable precautions to obtain the fair market value of the property at thetime when the property is sold and any surplus obtained by the secured creditor from sale proceedingsmust be held in trust for the debtor and other remaining creditors Foreclosure on the other hand is theprocess by which the secured creditor obtains full legal and beneficial title to the collateral in completesatisfaction of its debt In order to foreclose the secured creditor must provide notice of its intent to doso at which point the debtor and other creditors may challenge the proposed foreclosure on certainstatutory grounds

Although the stay of proceedings arising on a bankruptcy does not stay a secured creditors right to seizeor sell collateral subject to its security a court may grant a stay of a secured creditors rights for up tosix months However this power is rarely exercised in a bankruptcy proceeding

In Queacutebec the four remedies are the taking possession for purposes of administration the taking inpayment the sale by creditor and the sale by judicial authority A creditor intending to exercise ahypothecary right must give and file a prior notice

The practical advantage of taking possession for purposes of administration is to benefit from the shorterten day delay before the debtor can be forced to surrender the property It also helps alleviating fraudThe creditor who has through his administration obtained payment of the debt is bound to return to theperson against whom the hypothecary right was exercised in addition to the property any surplusremaining in his hands after payment of the debt

47

The taking in payment consists in taking the hypothecated property in complete payment of the debtTaking in payment extinguishes the obligation A creditor who has taken property in payment becomesthe owner of it from the time of registration of prior notice He takes it as it then stood and free of allreal rights published after his Where at the time of the creditorrsquos prior notice the debtor has alreadydischarged one-half or more of the obligation secured by the hypothec the creditor has to obtainauthorization from the court before taking property in payment

A creditor who holds a hypothec on the property of an enterprise may after obtaining the surrender ofthe property proceed with the sale by agreement by a call for tenders or by public auction Finally acreditor may proceed to the sale by judicial authority

A creditor holding a hypothec on a claim may even without prior notice withdraw his authorization tothe grantor to collect the claim


A creditors right of set off against an insolvent debtor applies to all claims made against the debtorsestate and to all actions instituted by the trustee for the recovery of debts due to the debtor unless theset-off would amount to a fraudulent preference If a creditor can prove that the right of set-off was aregular contractual term in its business dealings with the insolvent debtor a court is unlikely to find afraudulent preference

In Queacutebec there are slight differences between legal compensation in Quebec and legal and equitableset-off in the common law provinces A creditorrsquos right to set off his debt against an insolvent personarises at two conditions (1) the two debts coexist and (2) the debts are certain liquid and exigible Asfar as their coexistence is concerned the debts must arise from contracts that existed prior to the date ofbankruptcy When debts are not exigible set-off remains possible if the debts result from the samereciprocal relationship or at the very least if there is sufficient privity between the contracts a commonobject and a common cause between those contracts In theory equitable set-off is not available inQueacutebec


There is no difference between inter-company debts and debts from other creditors Paying inter-company debts before other creditors debts may constitute a fraudulent preference


If the bankruptrsquos estate includes securities in an affiliated company then those securities would beavailable for liquidation However creditor recourse against an affiliated company itself is generallyunavailable unless the affiliated company guaranteed the debts of the debtor Nevertheless there is thepossibility that a ldquocomplainantrdquo (ie a trustee or creditor) might be able to bring a statutory ldquooppressionclaimrdquo against an affiliate in order to remedy oppressive conduct


Upon being appointed the trustee in bankruptcy is required to call a meeting of creditors At such ameeting the creditors may appoint up to five inspectors by ordinary resolution Any person who is aparty to a contested action or proceeding relating to the bankrupts estate may not be made an inspectorCorporations also may not be an inspector During the administration of the bankruptrsquos property andmaking distributions to creditors the trustee is required to have regard to any directions given in

48

resolutions by the inspectors Where however there is a conflict between directions given to the trusteeby the inspectors and a resolution by the creditors the resolution by the creditors overrides theresolution of the inspectors Where the trustee disagrees with a direction given by the inspectors thetrustee may request that the court review the matter If the inspectors fail to exercise their powers thetrustee is required to call a meeting of the creditors for the purpose of

(i) substituting other inspectors and

(ii) permitting the creditors to take any action or give any directions that may be necessary for thetrustee to administer the estate



When a debtor files for protection under either the Bankruptcy and Insolvency Act or the CompaniesCreditors Arrangement Act there is no transfer of assets to any trustee or third party as there is with anassignment into bankruptcy The debtor remains in possession and control of its assets and operations toprovide it with a chance to restructure Unless there is a court order to the contrary the incumbentdirectors remain in charge of the company However until the plan or arrangement is approved by thecreditors it is the trustee monitors duty to monitor the debtor companys business and financial affairswith a view to providing information to the court and interested stakeholders

Once the debtor is adjudged bankrupt it ceases to have any legal capacity to dispose of or otherwisedeal with its property Therefore subject to the rights of the secured creditors the bankruptrsquos propertywill automatically vest in the trustee in bankruptcy


The restructuring mechanisms under both the Bankruptcy and Insolvency Act and the CompaniesCreditors Arrangement Act allow a court to authorize DIP financing The court may also authorize thecreation of a super priority charge against the debtors assets in favour of and to secure obligationsowed to the DIP lender On a debtors application and on notice to secured creditors likely to be affectedby the security or charge a court may make an order declaring that all or part of the debtors property issubject to a security or charge the court may do so in the amount it considers appropriate in thecircumstances and in favour of the parties who have agreed to lend money to the debtor during theproceedings However no pre-filing obligations may be secured by the charge as only debt incurredpost-filing may be secured by the charge When determining whether to approve of DIP financing and therelated super priority charge a court must generally consider the following factors

(i) the period during which the debtor is expected to be subject to the restructuring proceedings

(ii) how the debtors business and financial affairs will be managed during such proceedings

(iii) whether the debtors management has the confidence of the debtors major creditors

(iv) whether the DIP loan would enhance the prospects of a viable proposal arrangement being madewith the debtorrsquos creditors

(v) the nature and value of the debtors property

49

(vi) whether any creditor would be materially prejudiced as a result of the DIP lenderrsquos security orcharge

(vii) the trusteersquos monitors recommendations in conjunction with cash-flow statements


Generally employment relationships continue while a debtor corporation is restructuring under eitherthe Bankruptcy and Insolvency Act (ldquoBIArdquo) or the Companies Creditors Arrangement Act (ldquoCCAArdquo)However the employer is always able to terminate an employment relationship as long as suchtermination does not contravene applicable labour and employment laws Furthermore a court may notapprove a plan of arrangement or proposal under the restructuring provisions of either the BIA or CCAAunless the plan or proposal provides for the immediate post-sanction payment of all wages andcompensation employees would have otherwise been entitled to receive had the company becomebankrupt (see below regarding employeesrsquo entitlements upon bankruptcy) Furthermore a court may notapprove a plan or proposal unless it provides for the immediate payment of specific prescribed pensionplan obligations However despite these statutory obligations it is important to note that the SupremeCourt of Canada recently held that a court ordered super-priority in favour of a DIP lender may validlyoutrank the interests of all other creditors during the restructuring process including the interests ofpension plan beneficiaries

Once a company is adjudged bankrupt its employees will enjoy a super-priority charge on theiremployerrsquos assets to the extent of $2000 per employee for amounts owing as wages salariescommissions or compensation for services rendered within six months prior to bankruptcy For thepurposes of this super-priority the notion of ldquocompensationrdquo includes vacation pay but expresslyexcludes termination or severance pay The claim of an employee for such severance or termination payis thus not covered by the super-priority This super-priority has priority over all security affecting thebankrupts ldquocurrent assetsrdquo and is only subordinate to the property claims of unpaid suppliers farmersfisherman and certain deemed trusts It is also important to note that the directors of a debtor companymay remain personally liable for a certain portion of unpaid wages or vacation pay under provincial andfederal labour and corporate statutes Furthermore since 2008 employees have enjoyed rights under theWage Earner Protection Program (ldquoWEPPrdquo) This program provides that upon the bankruptcy of anemployer employeesrsquo claims admissible under the WEPP will be paid out by the Crown in order toexpedite payment of such amounts to employees Upon payment to the employees the super-prioritycharge noted above will be subrogated to the Crown

Apart from priority claims for unpaid wages there is also a super-priority for claims related tounremitted pension contributions This pension super-priority charges all of the assets of the bankruptemployer and is thus not limited in scope to ldquocurrent assetsrdquo as is the case for the wages andcompensation super-priority noted above


When a debtor enters into restructuring (whether under the Bankruptcy and Insolvency Act or theCompanies Creditors Arrangement Act) its executory contracts and the obligations thereunder are notautomatically terminated Post-filing providers of goods or services to a debtor seeking restructuringprotection need not supply the debtor on credit however such post-filing counterparties may notterminate their supply agreements simply because the debtor has sought creditor protection Incomparison debtors having filed for protection may under certain conditions disclaim or resiliatealmost any agreement to which they were a party on the date of their filing There are several relevantconditions and limitations on the power to disclaim or resiliate an agreement including

50

(i) Required notice notice must be given to the trustee or monitor and to the other parties to theagreement and unless there is any disagreement therewith the disclaimer or resiliation takes effect 30days after the notice

(ii) Trustee monitor or court approval no agreement may be disclaimed or resiliated unless the trusteeor monitor has approved of such proposed action If the trustee or monitor fails to approve the debtormay apply to the court for an order permitting the disclaimer or resiliation

(iii) Right to contest a party to the agreement has the right to contest the proposed disclaimer orresiliation provided it applies to the court (upon notice to the relevant parties) to challenge the noticethereof within 15 days of its receipt If its challenge is rejected by the court the disclaimer or resiliationtakes effect 30 days from the debtors notice or other date established by the court

(iv) Provable claim If an agreement is disclaimed or resiliated a party to the agreement who suffers aloss in relation to the disclaimer or resiliation is considered to have a provable claim in bankruptcy

(v) Debtorrsquos reasons - Within five days a debtor must provide written reasons for a proposeddisclaimer when requested to do so by a party to the agreement being disclaimed

Note that there may be special rules in regards to the ability to disclaim or resiliate commercial realestate leases or intellectual property rights



The trustee in bankruptcy is charged with managing the procedure by which creditors assert and provetheir claims against the bankrupt estate The Bankruptcy and Insolvency Act provides that all debts andliabilities present and future to which the bankrupt is subject at the date of the bankruptcy or to whichhe or she may become subject before his or her discharge by reason of any obligation incurred beforethe date of the bankruptcy shall be deemed to be provable claims A creditor must prove its claim to beentitled to share in any distribution that may be made by the trustee A proof of claim may be signed andsubmitted by the creditor or someone authorized by the creditor In the case of a corporation the proofof claim may be submitted by an officer or employee of the creditor corporation provided that he or shestates his or her position and affirms knowledge of the circumstances connected with the claim Theproof of claim must refer to a statement of account showing particulars of the claim and must refer toevidence by which it can be substantiated The trustee examines each proof of claim and subject topossible review by the court the trustee may disallow claims in whole or in part subject to thecreditorrsquos right to appeal to the court

Creditors with the significant exception of secured creditors are preclude from asserting claims againsta debtor in bankruptcy directly and must rather prove their claims as a part of the bankruptcy processThe court may however grant permission to a creditor to assert a direct claim under certaincircumstances such as fraud Secured creditors are entitled to realise on their security and need notprove a claim in bankruptcy (though the trustee may contest the validity of a security interest) Securedcreditors are however permitted to prove a claim in bankruptcy for the balance owing after realizing ontheir security


51

There is no specific statutory deadline for when an unsecured creditors must prove its claim to thetrustee in bankruptcy however there are certain statutory deadlines in regards secured claims Wherethe trustee has knowledge of property that may be subject to a security the trustee may require thepotential secured creditor to prove its security interest Where a secured creditor does not deliver aproof of claim to the trustee within 30 days of the trusteersquos request the trustee may with leave of thecourt sell the property free and clear of the secured creditors security


Generally claims against the assets of the bankrupt estate are to be paid in the following order

(i) Statutory super-priorities including

a Crown deemed trusts (employee source deductions)

b Wages and vacation pay of employees

c Prescribed pension plans (amounts deducted from employees remuneration and unpaid to the pensionfund)

d Claims of unpaid suppliers farmers fishermenhellipetc

(ii) Judicial security or charges that may affect the assets of an insolvent person or company seeking torestructure its business and affairs (ie security of a DIP lender)

(iii) Secured creditors

(iv) A certain portion of the claims of an enumerated list of ldquopreferred creditorsrdquo (ie landlords andmunicipal taxing authorities)

(v) Unsecured creditors who are paid rateably up to full extent of their claims

(vi) Certain claims that are subordinate to those of unsecured creditors

(vii) Claims of non-arms length creditors

(viii) Claims of silent partners

(ix) Wage claims of officers and directors

(x) Claims of creditors holding ldquoequityrdquo claims


No



Unlike under the US Chapter 11 process there is no concept of ldquocram-downrdquo in Canada In Canada

52

each class of creditors to which a proposal or plan applies must approve the plan or proposal by therequisite majorities


The formal bankruptcy process is generally complete when the debtor is discharge of its bankruptcy Abankrupt company cannot apply for a discharge from bankruptcy until it has satisfied the claims of itscreditors in full In comparison an individual bankrupt may apply for automatic discharge frombankruptcy as early as nine months after becoming adjudged bankrupt Before a discharge hearing isheld the trustee is required to prepare a report and send notice of the hearing to the Superintendent ofBankruptcy the bankrupt and every known creditor Once the court has considered the dischargeapplication the court can either

(i) Grant or refuse a discharge

(ii) Suspend the operation of a discharge for a specified time or

(iii) Grant a conditional discharge


Please refer to the ranking of creditor claims above



The only way to accelerate the process is by skipping over the restructuring process (ie where a planor proposal has been rejected) and head straight to formal bankruptcy liquidation





In order to be generally consistent with the requirements of the United Nations Commission OnInternational Trade Law Model Law on Cross-Border Insolvency Canadarsquos federal government recentlyamended the provisions of the Bankruptcy and Insolvency Act (ldquoBIArdquo) and the Companies CreditorsArrangement Act (ldquoCCAArdquo) respecting the recognition of foreign insolvency proceedings These new

53

statutory rules generally provide that an application for the recognition of foreign proceedings may onlybe filed by a ldquoforeign representativerdquo Furthermore the following three documents must accompany theforeign representativersquos application

(i) a certified copy of the instrument however designated commencing the foreign proceeding or acertificate from the foreign court affirming the existence of the foreign proceeding

(ii) a certified copy of the instrument however designated authorizing the foreign representative to actin that capacity or a certificate from the foreign court affirming the foreign representatives authority toact in that capacity and

(iii) a statement identifying all foreign proceedings in respect of the debtor that are known to the foreignrepresentative

In the absence of the first two required documents Canadian courts may accept any other evidence of theexistence of the foreign proceedings and foreign representatives authority that the court considersappropriate the court may require a translation of any document accompanying the application If a courtis satisfied that the application for the recognition of a foreign proceeding relates to a foreignproceeding and that the applicant is a foreign representative in respect of the proceeding the court mustmake an order recognizing the foreign proceeding there is no discretion in this regard However theBIA and CCAA provide that nothing prevents a court from refusing to act contrary to public policyFurthermore courts have extensive powers to tailor the orders they grant as they see fit Both the BIAand CCAA provide that an order may be made on any terms and conditions the court considersappropriate in the circumstances

Furthermore it is important to note that a number of Canadian courts including the Ontario SuperiorCourt of Justice (Commercial List) have formally adopted the Guidelines Applicable to Court-to-CourtCommunications in Cross-Border Cases (the ldquoGuidelinesrdquo) originally developed by the American LawInstitute and the International Insolvency Institute It is expected that the Guidelines will facilitate co-operative procedures for insolvency proceedings and other types of commercial disputes involvingcross-border proceedings where court-to-court communications might facilitate in harmonizingproceedings to help ensure consistent results and increase efficiency

54

China

Kevin Xu Partner Martin Hu amp Partners

wwwmhplawyercom kevinxumhplawyercom tel +86 21 50101666



(1) Mortgage including chattel mortgage and real estate mortgage

(2) Pledge including pledge of movables and Pledge of Rights and

(3) Lien


The administrator has the right to apply for invalidation of any of the following acts provided that theact involving the debtors assets was committed within 1 year before the court accepted the bankruptcyapplication

(1) uncompensated transfers of assets

(2) transactions executed at a clearly unreasonable price

(3) pledge of assets as collateral for non-secured debts

(4) prepayment of debts that are not due or

(5) any waiver of creditor rights

Furthermore unless any such debt settlement is for the benefit of the debtors assets during the last 6months before the court has accepted the bankruptcy application if the company makes a debt settlementwith any individual creditor the administrator has the right to apply to the court to invalidate the actinvalid in following situations

(1) an enterprise legal person is unable to repay its debts as they become due and its assets areinsufficient for the settlement of all debts and

(2) it is clearly insolvent


PRC Bankruptcy Law and PRC Company law set forth as a general principle that any director of acompany that violates his or her duty of care or duty of loyalty thus causing the bankruptcy of thecompany shall be held liable

Furthermore the legal representative of the debtor and other personnel who are directly accountableshall bear compensation liability pursuant to the law when a debtor commits any of the following acts

55

and harms the interests of the creditors

1 if within1 year before the court accepted the bankruptcy application






(6) concealment or transfer of assets for the purpose of debt evasion and

(7) fabrication of debts that are imaginary or fictitious or false admission of debts

2 as prescribed in answer 12 (second bullet point)

A reasonable reading of the law above makes us believe that the director should fall into the category ofldquothe other personnelrdquo and therefore undertake the same obligation

2 Taking action


Company could apply for entering in to three kinds of insolvency procedures after the permits of courtspecifically as

(1) Bankruptcy Liquidation happens when the companies have been announced as bankrupt a liquidationteam will take over the company to handle the liquidation assessment dispose distribution of the assetsunder the bankruptcy

(2) Restructuring gives a chance for the company to reorganize its operation and production to deal withthe creditor-debtor relation to get rid of financial distress with the aim to regain the capacity to operatenormally and

(3) Settlement could be directly applied by the company to court with a settlement agreement and afterthe creditorsrsquo meeting approval and the verdict of the court for the agreement of settlement theagreement of settlement could be enforced


There is an alternative way to reach an agreement of settlement in which case the court will not beinvolved in the preparation or negotiation of the agreement of settlement and the company could reachout-of-court settlement with all the creditors independently The bankruptcy procedure will beterminated upon courtrsquos verdict on approving the agreement


Bankruptcy Liquidation might be considered creditor-friendly and the reconstructing is more debtor-

56

friendly procedure


Where an enterprise legal person is unable to repay its debts as they become due and its assets areinsufficient for the settlement of all debts or where it is clearly insolvent or it is clearly insolvent itmay carry out restructuring pursuant to the provisions of this Law


A bankruptcy application form and the relevant proofs shall be submitted to the court for a bankruptcyapplication Where the application is submitted by the debtor the debtor shall submit a statement ofstatus of assets a debt list a list of its creditors rights the relevant financial and accounting reportsstaff resettlement scheme and a statement of payment of staff wages and contribution of social securitypremiums


The creditor the person(s) who isare responsible for liquidation pursuant to the law could apply forbankruptcy liquidation

Besides the company the creditor the capital contributors whose contribution represents one-tenth ormore of the registered capital of the debtor could apply for reconstructing


Bankruptcy Liquidation the court is entitled to decide whether to accept bankruptcy application or notinvalidate disposal of the debtorrsquos assets in certain circumstances appoint an administrator to managethe assets and corporate management and confirm and valid bankruptcy creditor rights

Reconstructing the debtor needs an approval from the court in order to manage its own assets andoperation under the supervision of administrator The restructuring plan could only become enforceableupon the approval of the court no matter whether the creditorsrsquo meeting has passed the draft or not Inaddition the directors supervisors and senior executives shall not transfer their shares of the companyto any other third parties

Settlement the court is entitled to decide whether the application of settlement shall be accepted makepublic announcement if the application has been accepted the agreement of settlement could onlybecome valid and enforceable upon the approval of the court who could decide to terminate thesettlement procedure if the agreement is considered as invalid one


The duration of insolvency process mostly depends on the complexity of each case and there is nostatuary regulation limiting the entire process of insolvency under PRC laws Generally speaking abankruptcy liquidation procedure takes no less than 3 months and the reconstructing procedure takes noless than 6 months


The public announcement and notices for the creditors to declare their creditor rights shall be made bythe court


57

Bankruptcy the enforcement of all court decisions against the debtor is suspended and the creditors atleast the unsecured creditors are no longer entitled to exercise their rights of enforcement against thedebtor

Reconstructing the debtor could manage its own business and operation under the supervision of theadministrator the security interests over specific assets of the debtor shall be suspended from exercisingduring the restructuring period a capital contributor of the debtor shall not request for a distribution ofinvestment gains Unless an approval by the court has been given no director supervisor or seniormanagement personnel of the debtor shall during the restructuring period transfer hisher equity stake inthe debtor to a third party


DIP is a possible solution under PRC Bankruptcy Law The debtor or its capital contributors whosecontribution represents one-tenth or more of the registered capital of the debtor may apply to the courtfor restructuring During the restructuring period upon application by the debtor and approval by thecourt the debtor may manage its assets and business under the supervision of the administrator Thedebtor shall perform the duties of the administrator in a proper way


No


There are special procedures applicable for the bankruptcy of state-owned companies and financialinstitutes under PRC law

3 Creditor issues


Bankruptcy Liquidation the unsecured creditorsrsquo rights will be affected by the different classes ofcreditors as demonstrated below Generally unsecured creditors need to declare its creditor rightsaccording to public announcement and notice in order to get its creditor rights reconfirmed by the court

Reconstructing the creditors could discuss and vote for the reconstructing plan all the promises madeby the creditors during the reconstructing period would become invalid afterwards however the debtspaid according the plan are still enforceable


Under PRC Bankruptcy Law holders of security interests over specific assets of the bankrupt shall beentitled to a preferential right of repayment in respect of such specific assets Where a creditor exercisesits preferential right of repayment but does not receive repayment in full the remainder of creditor rightswhich have not been repaid shall be deemed normal creditor rights

If the company owes to its workers any wages medical subsidies disability subsidies andcompensation expenses that are required to be included into the basic pension insurance and basicmedical insurance expenses of the individual worker accounts and fails to receive repayment in full theamounts remaining outstanding and prior to the creditorrsquos preferential right

58


The creditor has the right of set-off under PRC Bankruptcy Law

Where a debt is owed by the creditor to the debtor prior to the acceptance of the bankruptcy applicationthe creditor may propose to the administrator to set off the debt

Notwithstanding the foregoing there shall be no set-off in any of the following circumstances

(1) where a debtor of the debtor under consideration has obtained creditor rights to debts against thedebtor under consideration from another party after the acceptance of the bankruptcy application of thedebtor

(2) where a creditor creates a debt owing to the debtor whilst aware that the debtor is insolvent or isaware of the bankruptcy application except wherein the debt was created due to provisions under thelaw or under circumstances that have occurred one year before the bankruptcy application or

(3) where a debtor of the debtor under consideration obtains creditor rights to debts against the debtorunder consideration whilst aware that the debtor is insolvent or is aware of the bankruptcy applicationexcept wherein the creditor rights to debts were created due to provisions under the law or undercircumstances that occurred one year before the bankruptcy application


No


Generally speaking creditors of a company have no recourse against the affiliates of such companies


A creditor committee may be established by the creditors meeting under PRC Bankruptcy Lawmembers of the creditors committee shall obtain a written confirmation issued by the court

The creditors committee shall exercise the following rights

(1) to supervise the management and disposal of the debtors assets

(2) to supervise the distribution of the assets under a bankruptcy

(3) to propose creditors meetings to be convened and

(4) to perform any other duty as entrusted by the creditors meeting



Restructuring in the scenario of a restructuring upon the application by the debtor and approval of thecourt the debtor may manage its assets and business under the supervision of the administrator Wherethe court accepts a bankruptcy application it should simultaneously appoint an administrator An

59

administrator shall perform its duties pursuant to the provisions of PRC Bankruptcy Law and subjectitself to the supervision of the creditors meeting and the creditors committee Creditors who havedeclared their creditor rights pursuant to the law shall be the members of the creditors meetings

Bankruptcy liquidation by the creditors committee

Settlement by the debtor


In China it is difficult for a company in a bankruptcy process to borrow from banks or attracts investorsunless it is able to produce a credible reorganization plan or provide extra securities


Generally PRC Bankruptcy Law provides an option for the debtor or the administrator to arrange DIPfunding The law stipulates that during the restructuring period the debtor or the administrator mayobtain a loan for the purpose of continuing the business and also create a security interest for the loan


If the company owes to its workers any wages medical subsidies disability subsidies andcompensation expenses that are required to be included into the basic pension insurance and basicmedical insurance expenses of the individual worker accounts and fails to receive repayment in full theremainder amounts remain outstanding and prior to the creditorrsquos preferential right


Upon acceptance of a bankruptcy application by the Peoples Court the administrator shall have the rightto decide whether a contract that was concluded between a debtor and another party prior to acceptanceof the bankruptcy application but is still pending completion by the parties shall be continued or berescinded and the administrator shall give such notice of its decision to the other party

Where the administrator does not notify the other party to the contract within two (2) months from thedate of acceptance of the bankruptcy application or does not reply within thirty(30) days from the dateof receipt of a reminder by the other party to the contract the contract shall be deemed rescinded

Where the administrator decides on the continued performance of the contract the other party to thecontract shall perform the contract however the other party to the contract shall have the right to requestfor a security deposit from the administrator Where the administrator does not provide a securitydeposit the contract shall be deemed rescinded



The creditor shall declare the creditor rights to the administrator within the time limit determined by thecourt under PRC laws

(1) Independent declaration of creditor rights creditors shall declare their creditor rights to theadministrator within the time limit When making a declaration of creditor rights the creditor shallprovide documents including but not limited to (a) a statement in writing of the debt amount under the

60

creditors right (b) whether the creditors right to the debt is secured or non-secured and (c) provide therelevant evidence

(2) Joint and several declaration of creditor rights one of the joint and several creditors may beappointed as the representative for all joint and several creditors for a declaration of creditor rights orthe joint and several creditors may declare the creditor rights jointly

(3) Unless the creditors have declared all creditor rights to the administrator the guarantor or joint andseveral debtor shall based on its future right of recourse against the debtor declare creditor rightswhere the guarantor or joint and several debtor has not settled the debts for the debtor underconsideration


The Peoples Court shall upon accepting a bankruptcy application determine the time limit for anydeclaration of creditor rights to be made

The time limit for declaration of creditor rights shall commence from the date of the publicannouncement of acceptance of the bankruptcy application by the Peoples Court and its duration shallnot be less than 30 days or exceed three months from the date of commencement

How will claims rank (313)

The following expenses shall be repaid in the following sequence

(1) bankruptcy expenses and collective debts

(2) wages medical subsidies disability subsidies and compensation expenses owed to workers by thebankrupt which are to be included in the basic pension insurance and basic medical insurance expensesof the individual accounts of the workers and any compensation required to be paid to workers pursuantto provisions in laws and administrative regulations

(3) social security expenses other than those mentioned in the preceding item as owed by the bankruptand unpaid taxes of the bankrupt and

(4) normal bankruptcy creditor rights

Furthermore holders of security interests over specific assets of the bankrupt shall be entitled to apreferential right of repayment in respect of such specific assets


Generally no



Exist

Where the draft restructuring plan is resolved by all the voting groups the restructuring plan shall be

61

deemed approved

Where some voting groups have not resolved the draft restructuring plan the debtor or the administratormay negotiate with the voting groups which have not resolved the draft restructuring plan Such votinggroups may vote again following the negotiation The outcome of the negotiation shall not harm theinterests of other voting groups

Where the voting groups that have not resolved the draft restructuring plan refuse to vote or where thevoting groups have not resolved the draft restructuring plan at the second voting the debtor or theadministrator may apply to the Peoples Court for an approval of the draft restructuring plan where thedraft restructuring plan satisfies the following criteria

(1) security interests over specific assets of the debtor that are held by creditors have been settled in fullin respect of such specific assets pursuant to the draft restructuring plan the damages due to deferredsettlement have been fairly compensated and the security interests have not suffered substantive damageor the voting group has resolved the draft restructuring plan

(2) wages and taxes have been settled in full pursuant to the draft restructuring plan or the voting grouphas resolved the draft restructuring plan

(3) pursuant to the draft restructuring plan the ratio for settled normal creditor rights shall not be lessthan the ratio of settlement based on the bankruptcy liquidation at the time of approval of the draftrestructuring plan or such voting group has resolved on the draft restructuring plan

(4) the draft restructuring plan is fair and equitable for the interests of the capital contributors or thecapital contributors group has resolved on the draft restructuring plan

(5) the draft restructuring plan is fair to all members of the same voting group and the stipulatedsequence of settlement of creditor rights shall meet the legal requirements and

(6) the business plan of the debtor is feasible


See answer 61


See answer 53



See answer 53


See answer 22

62



ILO convention (No173)


Where a foreign courts judgment or ruling on a bankruptcy case that has taken effect involves assets inthe territories of the Peoples Republic of China held by a debtor and an application or request forjudicial recognition and enforcement of the judgment is made to the Peoples Court the Peoples Courtshall pursuant to the international treaty that the Peoples Republic of China has concluded or is amember of or pursuant to the principle of reciprocity examine the application or request make a rulingon recognition and enforcement when meeting the following situation

(1) where the Peoples Court deems that the application or request will not violate the basic principlesof law of the Peoples Republic of China

(2) will not threaten national sovereignty security and public interest and

(3) will not impair the lawful rights and interests of the creditors within the territory of the PeoplesRepublic of China

63

Costa Rica

Doris Rodriguez Partner AG Abogados

wwwag-abogadosnet email drodriguezag-abogadosnet tel 50622570006



In case of default and even if the company has been decreed in bankruptcy over financial difficulties acreditor might take security over assets through the execution or foreclosure of any mortgages pledgeagreements mortgage bonds etc If assets are not secured through the above mentioned methods and thecompany is not in a judicially declared bankruptcy there are other judicial proceedings that allow acreditor to freeze up or seize assets

After the bankruptcy is decreed by the court the company in financial difficulties will be ordered not toenrol any act whether sales mortgages liens etc before the Public Registry a communication will besent to banks and lending institutions to refrain from delivering securities to the debtor company anymail will be sent to the chosen procedural guardian instead to the company and all assets owned by thebankrupt company would be judicially seized So then unsecured creditors would have to presentthemselves to legalize their credit All credits are classified in a) mortgagepledge creditors b) workersc) landlords or tenantrsquos credits d) mass credits (expenses such as legal expenses legal fees personalcosts taxes health care costs food supplied during the pendency of the bankruptcy proceedings etc e)common credits (creditors who never legalized their credits within the bankruptcy process) Only thefirst group can maintain a separate judicial procedure for the credit but it shall be presented or taken bythe same judge of the bankruptcy proceedings


After the declaration of bankruptcy there is a prohibition to take any financial - non approved by thecourt decisions so they wouldnrsquot be vulnerable apart from any judicial recourses or appeals

If the transaction at hand is done before this declaration of bankruptcy it is only vulnerable as a result ofany civilian or criminal judicial pursue of indemnification as a result of a creditorrsquos belief that thecompany in financial difficulties or its directors are acting neglectfully with fraudulent intent or with thepurpose to defraud


Before any declaration of bankruptcy the director is still in charge of taking any administrativefinancialdecisions concerning the company in distress itself If these actions are done within the boundaries ofthe law it is highly difficult for any director to be liable Nevertheless some actions to negotiate with asingle creditor while leaving other creditors outside the lines of any restructuring financial plan maylead to misinterpretations that could potentially end in both criminal complaints ndashfraudulentadministration for instance- or civilian lawsuits ndashsuch as contractual simulation- Consequently anyactions towards the restructuring of any company in distress need to be taken very carefully and with theassistance of the appropriate legal counseling so that no creditors feel disadvantaged or left out

64

After the declaration of bankruptcy is done by a civilian judge there is an examination or qualificationof the bankruptcy by a criminal judge as fraudulent or not and a ldquosuspicion periodrdquo is declared inwhich all debtor acts are considered suspicious and retractable Criminal accusation could arise fromthis investigation stage of the bankruptcy

2 Taking action


Before the declaration of bankruptcy or insolvency there are two formaljudicial procedures that couldoffer a good solution For instance there is a Costa Rican procedure similar to Chapter 13 ndasha processthat refers to the intervention made by the US government to avoid bankruptcy of business orinsolvency of a person- In Costa Rica although very few companies have benefited from thisprocedural treatment there is a proceeding called administration and reorganization by judicialintervention by which a company in a difficult but surmountable financial situation in default or notinvolves itself to resolve its financial problems before and to avoid being declared in a bankruptcystate The request must meet very formal requisites and the candidates to benefit from such proceedingsshould be companies whose disappearance could cause pernicious social effects without substitutabilityoptions There is a variety of this procedure specially intended for financial institutions in whichSUGEF and SUGEVAL are involved

Another formal procedure is established in articles 743 to 759 of our Civilian Procedure Code inwhich a debtor who finds himselfherself in economic and financial crisis can propose a preventiveagreement to its creditors as long as it is not bankrupt insolvent nor in an administration andreorganization by judicial intervention process

Arbitration is another formal possibility with great known results It is always wise to introduce anarbitration clause in all contracts


Informal negotiation is always a possibility in these kind of situations but it should always be directedby proper legal counseling so that any payment arrangements while non-judicial are given the neededformality For instance formalizing the arrangement in a public deed if needed The arrangement couldinclude terms extension debt conversion trust formation the delivery of assets of the debtor aspayment of among others


Any non-judicial payment arrangement or submitting the company to administration and reorganizationby judicial intervention are the only procedures understood as more debtor friendly since they assumethat the company in distress is recoverable and still has realistic options of attending to its debtsBankruptcy ndashintended for merchants- or Insolvency ndashintended for non merchants-1 are overall creditorfriendly proceedings since they could be called upon by any of them in case of any kind of default andthe point is the distributions of assets of the debtor in the best way to cover the existing liabilitiesNevertheless these types of procedures may allow for the debtor to continue to receive salaries and tostop interests from amounting


In Costa Rica the materialistic theory prevails when it comes to defining debtor default it is considered

65

that when the debtor fails to comply with any obligation without taking into account the circumstances itis presumed that the debtor is in default regardless the fact that the debtor may have more assets thanliabilities (liquidity problems) The most usual trigger then for both insolvency and bankruptcy isrightfully proven default as understood above Other triggers are when the debtor is hidden or absentwithout leaving in charge of hisher company or business someone with sufficient power of attorney andproperly trained and with sufficient funds to meet its obligations when the company unreasonably closesits business when transfer of all of the companyrsquos assets in favour of one or more of its creditorsoccurs when fraudulent intent or purpose to defraud is established or any other circumstances that showthat the company is in a state of bankruptcy


The process is a simple request presented to the court and accompanied of different requisitesestablished by law In order to be entitled to ask for the debtorrsquos bankruptcy it is essential for thecreditor to demonstrate the existence of the credit itself as liquid and enforceable obligation and thepresentation of the original executive title or contract To access a bankruptcy case it is essential thatthe debtor is a merchantbusiness even if the cause of the obligation has no commercial character(article 852 Costa Rican Commerce Code) Serving as the basis for the declaration of bankruptcy anyof the securities to which the law gives proper enforceability may be presented A private documentwith no immediate enforceable nature may however serve as basis when according to the courtsjudgment the signature or signatures in the document are regarded as authentic

The debtor company can as well submit itself to the bankruptcy procedure presenting an generalaccounting standing status and details of the credits to its favour causes of the financial status at handstate of losses and incomes date in which default started among others

The insolvency procedure is very similar in structure to bankruptcy

All documentation along with a written request is rendered to the court for approval of thebankruptcyinsolvency application Bankruptcy and insolvency shall be declared by a judge in the samejurisdiction as the personacutes company or businessacutes address


Both creditors and debtors can place the company into bankruptcy or insolvency proceedings In case ofdebtor companies the request must be approved by the shareholders


Once bankruptcy or insolvency is declared court involvement is 100 A guardian is appointed whowill have general power of attorney in case of bankruptcy for example requiring authorization to sellany assets outside the judicial process or negotiate accept any claims or make waivers over assets witha superior value to cent1000000 Overall this makes the guardian pretty restricted to take any decisionson his own without the intervention of either the creditorrsquos committee or the judge The judge presidesand conducts all operations in bankruptcy until its closure performing a complex function sometimespredominantly administrative and sometimes exclusively judicial


A bankruptcyinsolvency can last years but the number depends on the quantity and complexity of theassets and liabilities involved that can directly make a process more or less complicated


66

All notices are done though court


The Bankruptcy declaration by the judge irrevocably fixes the position of creditors ceasing of interestaccruing or arrears against the mass of creditors and produces the immediate maturity andenforceability of all obligations of the debtor So far this would be the benefit the debt is no longergoing to be enlarged by time passing but all liabilities will be enforceable right away Bankruptcy isunderstood as a weapon of the creditors to get paid regardless of debtors assets Nevertheless anarrangement could be presented at any point in time before the final distribution of assets but only if thebankruptcy is declared non criminal


Non of the procedures in existence in Costa Rica -already reviewed in point 2 a)- allow the possibilityof retaining possession of assets paying fair market value apart from contractual value Neverthelessthere are good judicial and non-judicial options that alongside with the right legal counseling can offer away out for companies in financial distress


The absence of a more complete bankruptcy system in Costa Rica that includes non judicial butgovernmentally assisted arrangements may allow for the loss of significant economic opportunitiesNotwithstanding Costa Rica bankruptcy law provides for liquidation the shortage of officiallysanctioned bankruptcy cases indicates that the country is not achieving the benefits of a fair and efficientsolution Likewise Costa Rican law does not provide directly the type of procedures similar to therehabilitation found in Chapter 11rsquos of the Bankruptcy Law in the United States Therefore Costa Ricamay not be taking advantage of an important opportunity to return some companies back to viability oreven profitability This could easily be improved through the strengthening and updating of the existinglegal framework As stated in section 8 b) Costa Rican law allows some discrimination against foreigncreditors which has been strongly criticized by international organizations such as the World Bank


R It is highly uncommon for politics to factor their way into a bankruptcy proceeding

3 Creditor issues


As explained before once the assets and liabilities have been put to order the creditors that havepresented themselves to legalize their credits before the court in the bankruptcy or insolvencyproceedings will be categorized in a) secured creditors (mortgages mortgages bonds publiclyinscribed pledges etc)2 b) workers salaries and others since they enjoy a very special privilege overall creditors3 c) credits for landlords and tenants4 d) mass credits ndashjudicial and administrativeexpenses creditscontracts acquired by the guardian other acts and contracts not honoured by thedebtor taxes among others- and e) common credits which are the ones that were never legalizedUnsecured credits since they are mass credits or common credits depending on whether they arelegalized are paid out of what is left after paying the first three categories Having legalized its crediton time the creditor has the right to future distributions but not to past distributions of assets

67


In case of declaration of bankruptcy or insolvency a secured creditor could legalize the credits withinthe bankruptcy or insolvency proceedings This will make the credit enforceable right away instead ofaccording to the date established in the particular contract


Setoff -understood as the debtorrsquos claim that a particular creditor owes the debtor money as well whichshould be subtracted from the amount claimed by the creditor- exists in Costa Rica in the sense thatwhen the court orders the assets and liabilities the debtor shall expose the status of all assets includingthe credits in its favour against any of the creditors that would then be accounted and examined by theguardian legalizing the credits and reported to the judge


A direct intercompany debt transfer involves a loan from one affiliate to another without theparticipation of an unrelated party to the economic group debt that is sometimes generated with lowinterests etc

In recent times and although the legislation is not specifically directed to economic groups due to theeconomic and financial problems companies in economic groups have been experiencing leading themto default bankruptcy has been decreed by judges not only to individual companies but to groups ofcompanies known as groups of economic interest Nevertheless we consider this should be legislatedin detail and accordingly to the importance of this type of organizations nowadays So if all companiesof the economic group are domiciled in Costa Rica there should be no problem as they would be treatedas the same bankruptcy If the debt issue is between a foreign and a national branch what is stated insection 8 b) should be observed


No there are no creditor recourses available in respect to any company affiliates if they are consideredas part of the same group of economic interest


The creditors committee do exist in our jurisdiction consisting of a group of people pursuing a singlegoal in case of bankruptcyinsolvency the liquidation of the debtors assets and the satisfaction of theirown economic interests It is a committee of continuous presence in the bankruptcyinsolvencyproceedings Its role is the knowledge and legalization of credits authorizing the guardian to performone or more of the acts set forth in section 2 g) above approving the continuation of a business of thebankrupt to facilitate settlement or liquidation hear and resolve questions or issues proposed by theguardian etc



All judicial procedures even if they are not specifically bankruptcy establish the appointment of aguardian that will have different capabilities according to the procedure at hand The appointed guardianwill have power of attorney ndashin different capabilities- but its actions will be reined by the creditoracutes

68

committee and overseen by the judge in most procedures


The Costa Rican system allows a third party to pay for the debtor if it is allowed by the creditoracutescommittee and admitted by the judge Whichever arrangement exists behind the scenes between the thirdparty and the debtor is of no importance to the bankruptcy or insolvency proceedings which could bedeclared extinct due to payment


Debtor in Possession funding does not exist in Costa Rica although as stated before extrajudicialarrangements are allowed in some circumstances even if bankruptcy or insolvency have already beendeclared


As stated before employees enjoy a special kind of privilege in bankruptcy or insolvency proceedingsThe guardian is obliged to pay the notice severance pay and compensation for damages if any within30 days of the formal recognition of credit The bankruptcy of the employer is considered ground fortermination of the employment contract without liability to the employee so no employees will lose anyapplicable labor rights


Contracts would have to be approved by the creditorrsquos committee and entered to by the companyrepresented by the guardian



Each one of the creditors would have to legalize or present their credit within the proceedings in orderto participate in the creditorrsquos committee ndashmay it be administration and reorganization by judicialintervention preventive judicial arrangement bankruptcy or insolvency- but each proceeding hasdifferent requisites to do so For bankruptcy for example the creditor must legalize the credit by filingalong with the request whichever document that satisfactorily evidences the contractual obligationoriginating the liability


Timing for credit legalization in bankruptcy will occur according to the period the judge has establishedfor such in the formal declaration of bankruptcy -887 Commerce Code-


This subject has already been reviewed in section 3 a) above


No in Costa Rica there are no insolvency officers The insolvency or bankruptcy proceedings are

69

handled as explained in this same document through the court if the company or person decides tosubmit to any of the formal procedures There are no insolvencybankruptcy proceedings through otheradministrative or governmental institutions



The study of the 4 different classes of Costa Rican procedures applicable in case of a person orbusiness in financial trouble shows that the most important organ of any one of the proceedings it is theJudge since it is heshe who leads and ultimately approves the actions and agreements of the otherorgans such as the guardian and the creditors committee This is accepted due to the understanding ofthe judge figure as one of impartiality especially in a process where there are many interests involvedand sometimes opposed to each other The judge in Costa Rica is an authority figure who is ultimatelydecides what is best for the mass creditor and the debtor notwithstanding that those involved can appealagainst their decisions According to what is already stated and depending on the eye of the viewerCosta Rican proceedings may be understood as cram-down procedures


A procedure can formally be concluded by agreement between all creditors extrajudicial agreementbetween creditors and debtor or when all assets have been distributed and the final distribution hasbeen done The judge declares the process concluded and sends an edict in that respect to be publishedin the judicial official bulletin


Creditor classes do exist ndash section 3 a) above ndash so it is recommendable to have proper legal counselingwhen you are giving a credit so it is properly backed up and secured in case of financial troubles of thedebtor



Negotiation through legal counseling and arbitration is always a possibility as well as any privatearrangement done with the help of legal counseling


No as explained in section 5 d) above there are no other governmental procedures aside from theformal ones



70


If there is bankruptcy of a Company or Economic Group who has in the Republic one or more branchesor agencies they will be put into liquidation if so requested by the authority responsible for the mainbankruptcy proceedings It has to be taken into account though that any existing assets in the RepublicCosta Rica belonging to one declared bankrupt in another country can only be executed or foreclosedupon by creditors resident in Costa Rica first -980 Civilian Code- and only what has remained afterwill correspond to creditors of the bankruptcy proceedings pending abroad

When bankruptcy is declared to an agency or branch of a foreign company or economic group andnational creditors have not been paid in full after bankruptcy proceedings in Costa Rica their right tocharge any pending amounts to the parent company is recognized

71

Denmark

Peter Wedel Ranch Krarup Partner Mazanti-Andersen Korsoslash Jensen amp Partners

wwwmazanticom email pkmazantidk tel (+45)40103231



Mortgage pledge floating charge assignment and seizure


Several transactions can be deemed voidable transactions for example transactions at prices that differfrom the actual values larger payments mortgages seizures set-offs and other improper transactions

The time frames are typical 3 to 6 months but can be up to 2 years if the transaction is made to benefit arelated party


There is no specific director liability in case of bankruptcy but a director might be liable if he bynegligence has caused creditors to loose money Normally directors will not be liable just because acompany is declared bankrupt

2 Taking action


Reconstruction Covers compulsory composition and controlled selling of assets or activity

Bankruptcy The proceedings will on behalf of all creditors pursue all the assets and divide theproceeds to the creditors in a specific priority

Compulsory winding-up The Commercial Agency will ask the court to initiate winding-up procedure ifthe company does not file the annual report If the company is insolvent the winding-up procedure willbe declared bankrupt


It is possible to agree on a voluntary composition out side the control of the court or through a settlementwith all or only a few of the creditors Since this is based on agreements with the involved creditors itwill only affect these creditors


Reconstruction can be debtor friendly but the creditors have the right to vote against the debtor and can

72

decide that the reconstructor has to take over the management of the company

Bankruptcy will always be creditor-friendly


If the debtor is no longer able to fulfill his obligations as they fall due


A petition for reconstruction or bankruptcy is filed to the court The court will then convene a meeting toconsider the matter If the court finds that the conditions are fulfilled the court will then appoint areconstructor or a administrator (ldquoKuratorrdquo)


Either the debtor or a creditor If the company is under compulsory winding-up the appointed liquidatoras well can file for bankruptcy


Usually the courts involvement will be limited to the bankruptcy petition and the appointing of thereconstructor or the administrator and subsequent decisions in disputes and approving the financialstatement and administrators and reconstructors fees


The length of the proceedings depends on the company and the complexity of the winding-up Normallyit will take between 1 and 3 years


The bankruptcy must be published by the Danish State Gazette (ldquoStatstidenderdquo) The administrator mustalso advice all known creditors so they are made aware that they have to file their claims


The enforcement of all court decisions are suspended and creditors will not be able to pursue claimsand the creditors are prevented from proceeding to executionseizures in the companys assets


No


No


No

3 Creditor issues

73


The unsecured creditors must wait for the bankruptcy proceedings to end and the dividend to be paid inorders of priorities set out below in answer 53


If the administrator hasnrsquot sold the secured asset within 6 month from the initiation of insolvencyproceedings the secured creditor can demand that the administrator sell the secured asset by way ofexecution or foreclosure


The availability of a creditor to set off is limited in bankruptcy but can be allowed in very specifiedsituations The claims need not to be due for payment but the nature of the claims must not exclude set-off


No Inter-company debt is treated in the same manner as all other debts Only the inter-company debtwill not be accepted if the creditors need to vote on subjects regarding the bankruptcy proceedings


An affiliated company will normally not be liable for the bankruptcy of an affiliate and the creditorswill normally not have any recourse against an affiliate


In case of reconstruction or bankruptcy the court might establish a creditors committee if it is deemedappropriate Normally a creditor committee is not established



In case of bankruptcy the management looses all rights to dispose of the assets and represent thecompany in any way The administrator takes over the management of the company and makes alldecisions on behalf of the company

In case of reconstruction the management continues to lead the company and make the decisions onbehalf of the company but all significant decisions has to be approved by the reconstructor Thecreditors can have the management removed and have the reconstructor to take over the management ofthe company


The company is financed through its current assets To initiate bankruptcy proceedings the creditor filingfor bankruptcy has to pay DKK 30000 equivalent to euro 4000 to start the proceedings This amountwill be returned to the creditor if sufficient assets is found to cover the proceedings


74

The administrator can ask one or more creditors for financial assistance in the proceedings Such a loanwill have priority to other debt


The claims of employees over their debts for wages holiday allowances and contributions are givenpriority and are paid before the other creditors

The employees are secured by the Danish Government (ldquoLoslashnmodtagernes Garantifondrdquo) and theemployees will typical be covered in case of bankruptcy


The bankruptcy estate may enter in the contractsagreements If the estate selects to enter in to theagreement the estate is entitled and bound by its terms with priority

If the estate refuses to enter into the contract the other party can terminate the contract and claimcompensation for his loss

For ongoing contracts the estate is not normally obliged to respect a longer notice period or tenure butonly a reasonable or customary notice (bankruptcy regulation)











The employees are secured by the Danish Government (ldquoLoslashnmodtagernes Garantifondrdquo) and the

75

employees will typical be covered in case of bankruptcy







No

How is procedure formally concluded

The administrator or the reconstructor submit a financial statement and a statement to the court and thecreditors The court convenes the administrator or the reconstructor and creditors to a meeting anddecides that the proceedings has now ended


See answer 53



No


No



None


The Minister of Justice may provide that decisions of foreign courts and authorities relating to

76

bankruptcy suspension of payments or other similar proceedings shall be binding and enforceable inDenmark

The Minister of Justice may specify the conditions under which a foreign states law will apply to thedetermination of the legal consequences of bankruptcy suspension of payments or other similarproceedings

However the Minister of Justice has never used his power to enact such rules and Denmark recognizestherefore not a foreign insolvency proceedings

For the Nordic countries except the Nordic Bankruptcy Convention

77

Estonia

Ants Mailend Partner Law Firm VARUL

wwwvarulcomen email antsmailendvarulcom tel +372 626 4300



Estonian law distinguishes between security over movables and real security It is also possible topledge rights

Estonian right of security over movables recognizes rights of security arising from a transaction or lawand right of security on seized assets Rights of security over movables are possessory pledgeregistered security over movables commercial pledge and maritime mortgage Right of security oflessor is an example of a right of security arising from law Right of security on seized assets is also aright arising from law it is created when a thing is delivered to a bailiff and it grants a claimant thesame rights as a pledge established under a contract or some other right of security that has arisen fromlaw

Out of rights of security over movables only possessory pledge is tied to the delivery of a thing to thepledgee Possessory pledge contracts must be concluded in writing if the value of the pledged objectexceeds 50 euros As regards other rights of security the pledged object remains in the possession of thepledgee and the right of security is registered in the respective register Only entrepreneurs entered inthe commercial register may establish a commercial pledge A commercial pledge may be establishedover entire movable property of a company Maritime mortgage is based on regular mortgage

The only real security is mortgage Mortgage does not presume the existence of a claim to be securedJudicial mortgage is an exception here - it is established to the extent of the claim of the action andsecures the claim to be satisfied by a court decision A debt can be secured with a mortgage establishedon an immovable of the owner or another person Mortgage secures also collateral claims relating to theprincipal claim In order to establish a mortgage a notarized agreement is required and a correspondingentry has to be made in the land register


Validity of a transaction can be challenged on general civil law bases In the event of a breach ofcontract also general private law legal remedies may be invoked

Another possibility to challenge a transaction is by way of recovery procedure Recovery is anexceptional possibility stipulated in the law which entails the reversal of otherwise valid transaction oractivity which is harmful to the creditors The possibility of recovery is stipulated in the Code ofEnforcement procedure and in the Bankruptcy Act

Pursuant to the Code of Enforcement Procedure an action must be filed against a debtor andcounterparty to recover a transaction that is damaging to the interests of the claimants In order torecover the claimant must have an enforcement instrument and the claim must have fallen due andmaking a claim for payment on the assets of a debtor has not brought about satisfaction of the claim of

78

the claimant in full or there is reason to presume that making the claim for payment does not result in thesatisfaction of the claim A transaction can be recovered if it is made by a debtor if it is made withinthree years before an action is filed if it was knowingly made to damage the interests of claimants andthe counterparty knew or should have known that the transaction damages the interests of claimantsExceptions apply to the recovery of a gratuitous contract division of joint property and provision ofsecurity

Recovery is possible also in bankruptcy proceedings If a debtor is declared bankrupt the bankruptcytrustee files an action to recover a transaction In recovery the court revokes pursuant to the BankruptcyAct transactions which were concluded or other acts which were performed by the debtor before thedeclaration of bankruptcy and which damage the interests of the creditors Transactions which can berecovered are ones which were made

(i) during the period from the appointment of an interim trustee until declaration of bankruptcy

(ii) within one year before the appointment of an interim trustee if the other party knew or should haveknown that the transaction damages the interests of the creditors

(iii) within one to three years before the appointment of an interim trustee and if the debtor intentionallydamaged the interests of the creditors by the transaction and the other party to the transaction knew orshould have known that the debtor damaged the interests of the creditors by the transaction

(iv) within five years before the appointment of an interim trustee if the debtor intentionally damagedthe interests of the creditors by the transaction and the other party to the transaction was a personconnected with the debtor and knew or should have known of the damage

Exceptions apply to the recovery of a gratuitous contract division of joint property performance of afinancial obligation and provision of security


A board member may face both civil and criminal liability

According to the general principle members of a management body are liable to the legal person andnot to its creditors Claim for compensation for damage on contractual basis may be filed by a companyCreditor of a public limited company may demand compensation for damage to the company if he cannotsatisfy his claims on the account of the companyacutes assets However in certain cases a board membermay be non-contractually liable directly to the creditors of the company

In assessing the applicability of contractual liability to a company the activities of a board member areweighed and it is assessed whether or not he has performed his obligations Board member is liableonly for damage resulting from non-performance or unsatisfactory performance of his obligations Forexample using companyacutes assets in its own interest making a transaction on behalf of the company in itsown interests using companyacutes assets or a loan against the interests of the company in its own or someother personacutes interests and unduly increasing the obligations of the company constitute a violation of anobligation Also taking or granting a big loan if it is evident that it is not possible to pay back orrecover the loan transferring assets below their market value careless choice of a party to a contractmaking a transaction on unusual terms and other economically unuseful behaviour are considered aviolation of an obligation

In order for a board member to be directly liable to the creditor the damage must have been caused tothe creditor by non-performing an obligation arising out of law Compensation for damage may be

79

demanded only if the aim of the obligation arising out of law was to prevent the occurrence of damage tothe creditors The law provides only a few of such legal grounds for filing a claim for damages one ofthose is for example obligation to file a bankruptcy petition and call a meeting of shareholders if netassets are not conforming to the requirements

A board member may be criminally liable for example if the board member concludes a contract withanother legal person for whom the transaction was useful and with whom the board member ispersonally connected by abusing trust Furthermore liability may arise in cases of intentionalviolations related to the organization of companyacutes activities if that causes the legal person majorproprietary damage

Failing to file a bankruptcy petition and causing insolvency are also criminally punishable

2 Taking action


In Estonia there are two proceedings aimed at solving financial difficulties of an undertakingbankruptcy proceedings which are regulated with the Bankruptcy Act that entered into force on 1 January2004 and reorganization proceedings which are regulated by the Reorganisation Act that entered intoforce on 26 December 2008


The debtor and the creditor are permitted to agree on settling their debts outside official bankruptcy orreorganization proceedings but there are no specific provisions for regulating such agreements Generallegal provisions regulating obligations which are contained mainly in the Law of Obligations Act andthe General Part of the Civil Code Act apply to agreements


More importance is attached to the protection of the debtoracutes interests in reorganization proceedings ofan undertaking than in bankruptcy proceedings due to the objectives of reorganization proceedingsBankruptcy proceedings proceed from the aim to satisfy creditorsacute claims and therefore the proceedingsare more focused on protecting creditors


In order to declare bankruptcy the debtor must be permanently insolvent Pursuant to the BankruptcyAct a debtor is insolvent if the debtor is unable to satisfy the claims of the creditors and such inabilitydue to the debtors financial situation is not temporary A debtor who is a legal person is insolvent alsoif the assets of the debtor are insufficient for covering the obligations thereof and due to the debtorsfinancial situation such insufficiency is not temporary

If a bankruptcy petition is filed by a debtor the court declares bankruptcy also if insolvency is likely tooccur in the future

Reorganization proceedings are commenced only if insolvency is likely to occur in the future TheReorganisation Act does not allow an insolvent undertaking to be reorganized Under the BankruptcyAct it is possible with a compromise to reorganize a company that has gone bankrupt

80


A bankruptcy petition may be filed by the debtor or a creditor In order to request the commencement ofbankruptcy proceedings the debtor has to file a bankruptcy petition with a court where the company hasits registered seat It is presumed that the seat indicated in the register one year before filing of abankruptcy petition is the seat of the debtor unless it is proved that the seat of the debtor is elsewhereThe bankruptcy petition of a creditor has to substantiate the debtors insolvency and prove the existenceof a claim The creditor has to substantiate the insolvency of the debtor by relying inter alia on at leastone of the following circumstances

the debtor has failed to perform an obligation within thirty days after the obligation has fallen due andthe creditor has cautioned the debtor in writing of the creditors intention to file a bankruptcy petition(bankruptcy caution) and the debtor has thereafter failed to perform the obligation within ten days it hasnot been possible within a period of three months to satisfy a claim in execution proceedings conductedwith respect to the debtor due to lack of assets or it has become evident in the execution proceedingsthat the assets of the debtor are insufficient for performing all the obligations thereof the debtor hasdestroyed hidden or squandered the debtors property or made grave errors in management as a result ofwhich the debtor has become insolvent or has intentionally caused the insolvency of the debtor in anyother manner the debtor has notified the creditor the court or the public of the inability of the debtor toperform the obligations thereof the debtor has left Estonia in order to evade performance of theobligations thereof or hides with the same purpose The petitioning creditor has to file proof of theamount and basis of and the term for satisfaction of the claim of the creditor

A debtor has to substantiate the insolvency thereof in the bankruptcy petition A debtor has tosubstantiate the insolvency thereof by annexing an explanation concerning the cause of the insolvencyand a list of the debts to the bankruptcy petition The list of the debts has to set out the names and seatsor residences of the creditors of the debtor the claims of the creditors and information concerning theassets of the debtor The debtor signs the explanation and the list of the debts

In order to commence reorganization proceedings a reorganization petition must be filed with a countycourt where the debtor has its seat An application for the reorganization of an undertaking has to besubmitted by the undertaking A reorganization application of an undertaking has to set out anexplanation of the undertaking regarding the reasons for the economic difficulties and has to substantiatethat the undertaking is likely to become insolvent in the future the enterprise requires reorganization thesustainable management of the enterprise is likely after the reorganization A financial statement for theprevious financial year an overview of the financial situation profit or loss and cash flows of thedebtor and a list of debts as at the date of submission of a reorganization application must be appendedto the reorganisation petition The list of debts must set out the name and details of the obligee and theamount of the principal claim and the collateral claim and information concerning the assets of theundertaking


A bankruptcy petition may be filed by the debtor or a creditor A reorganization petition may be filedonly by the undertaking


Both bankruptcy proceedings and reorganization proceedings are effected as judicial and extra-judicialproceedings

Courts exercise supervision over the lawfulness of bankruptcy proceedings and perform other dutiesprovided by law Courts decide on the commencement of proceedings appointment of an interim trustee

81

and declaration of bankruptcy also termination of bankruptcy proceedings (no matter what the basis fortermination) Courts settle all kinds of disputes particularly disputes related to defending claims butalso actions for recovering assets A court appoints and releases the trustee determines the remunerationand expenses of the trustee A court approves a compromise also the decision to terminate legalpersons In addition a court exercises general supervision over the activities of the trustee

A court has the right to be informed of the course of the proceedings and it may examine the trustees fileA court is obliged at its own initiative to take measures to ascertain the facts relevant to the bankruptcyproceedings and organize collection of the evidence necessary for the ascertaining of the facts

In reorganization proceedings the main role of the court is the commencement of reorganizationproceedings approving the reorganization plan and deciding on termination of the reorganizationproceedings A court also performs other activities provided by law for example deciding the amountof creditoracutes claim and existence of security in case of dispute

In reorganization proceedings the court also decides on commencement of reorganization proceedingsappointment of reorganization adviser approval or revocation of reorganization plan termination ofreorganization proceedings determines the amount of remuneration and expenses to be reimbursedreleases the reorganization adviser


The length of a bankruptcy proceeding depends on the complexity of the case and whether the partieschallenge court rulings made during the proceedings and how the process of defending claims goes As arule bankruptcy proceedings last a year or two However it is not unusual for complex bankruptcyproceedings involving court cases to last for more than two years

The time from commencing reorganization proceedings up to approving a reorganization plan may be amaximum of 171 days considering the terms in proceedings That time may be prolonged in the event thatthe commencement of reorganization proceedings or the approval of a reorganization plan is challengedalso in case there is a dispute over the amount of the claim or existence of security


The petitioning creditor has to file proof of the amount and basis of and the term for satisfaction of theclaim of the creditor In addition to the existence of a claim the bankruptcy petition of a creditor mustsubstantiate the debtors insolvency If the creditor wishes to file a bankruptcy petition on the groundsthat the debtor has failed to perform his obligation to the creditor the main way to substantiateinsolvency is showing that the debtor has failed to perform an obligation within thirty days after theobligation has fallen due and the creditor has cautioned the debtor in writing of the creditors intention tofile a bankruptcy petition (bankruptcy caution) and the debtor has thereafter failed to perform theobligation within ten days Although the law provides other grounds for substantiating insolvency(eg) they are exceptional in reality Thus as a general rule the creditor has to caution the debtorbefore filing a bankruptcy petition

A debtor has to substantiate the insolvency thereof by annexing an explanation concerning the cause ofthe insolvency and a list of the debts to the bankruptcy petition

In order to commence reorganization proceedings a financial statement for the previous financial yearan overview of the financial situation profit or loss and cash flows of the debtor and a list of debts as atthe date of submission of a reorganization application must be appended to the reorganization petitionThe reorganization petition has to provide explanations regarding the reasons for the economic

82

difficulties and substantiate the existence of conditions for commencing reorganization proceedings


Rights of the debtor are stipulated in the Bankruptcy Act For instance the debtor has a right to file abankruptcy petition object to the bankruptcy petition of the creditor participate in the preliminaryhearing appeal the bankruptcy decision receive information which means the debtoracutes right to examinethe trusteeacutes file and the court file of the bankruptcy case complain about the activities of the interimtrustee or trustee require the release of a trustee express an opinion regarding the trusteeacutesremuneration participate in court proceedings participate at the general meeting of creditors andchallenge the decision of general meeting file objections to the claims of creditors require thetermination of bankruptcy proceedings Debtoracutes rights are limited with respect to assets andmanagement

In reorganization proceedings the debtor has a right to file a reorganization petition express his opinionabout the appointment of a reorganization adviser and upon determining the remuneration of thereorganization adviser and expert appeal court rulings Unlike in bankruptcy proceedings inreorganization proceedings the debtor has a right to manage and dispose of his assets


In bankruptcy proceedings upon declaration of bankruptcy the right to manage and dispose of assetstransfers to the trustee In reorganization proceedings however the undertaking continues its economicactivities and retains control over its assets and the right to dispose of assets remains with themanagement of the undertaking or members of a body substituting it Reorganization adviser verifis thepurposefulness of the transactions of the undertaking during reorganization proceedings and if it appearsthat the undertaking is wasting its money or makes transactions that are damaging to the creditorsacuteinterest the court terminates reorganization proceedings


In relation to bankruptcy proceedings it is important to note that creditors are required to notify thetrustee of all their claims against the debtor which arose before the declaration of bankruptcy regardlessof the basis or the due dates for fulfilment of the claims no later than within two months as of the date ofpublication of the bankruptcy notice in the official publication Ametlikud Teadaanded (OfficialNotices) If a claim is filed after expiry of the aforementioned term with good reason the generalmeeting may restore the term for filing the claim at the request of the creditor If the term for filing aclaim is not restored the claim may be defended but in the case of acceptance the claim is satisfiedafter satisfaction of the accepted claims which were filed on time A claim cannot be filed after thedistribution proposal has been submitted to the court for approval If the creditor does not submit aclaim in bankruptcy proceedings his claim terminates This does not apply to claims secured by apledge Claims which are secured by a pledge may be submitted until a distribution proposal issubmitted to the court for approval If the owner of a claim secured by a pledge does not follow thisterm the term for filing a claim need not be restored

In relation to reorganization proceedings it is important to note relation to reorganization proceedingsthat a reorganization plan does not apply to creditors to whom the reorganization notice and the draft ofa reorganization plan for examination and for an opinion has not been delivered or who is otherwiseunaware of the reorganization proceedings A statement of claim may be filed on the basis of a claimwith respect to which reorganization proceedings do not apply also enforcement proceedings may becarried out with respect to such a claim


83

No

3 Creditor issues


In bankruptcy proceedings creditorsacute claims not secured by a pledge will be satisfied after the claims ofpledgees have been satisfied In reality their claims are usually either entirely unsatisfied or satisfied toa small extent

The interests of creditors whose claim is not secured by a pledge are better protected in reorganizationproceedings than in bankruptcy proceedings Creditorsacute claims are transformed ie they reduce theirclaims by certain extent extend the deadline for performance or allow the obligation to be performed ininstallments but in case the reorganization is successful their claims are still satisfied to a larger extentthan in bankruptcy proceedings The real problem is that reorganization is started too late which is whyit often changes into bankruptcy proceedings and the end result is the same for creditors whose claim isnot secured by a pledge ndash their claims are either entirely unsatisfied or are satisfied to a very smallextent


A pledged object is sold at a public auction or without an auction based on a precept of a generalmeeting of creditors or with the consent of the bankruptcy committee if the sale of assets in anothermanner is more profitable With the consent of the trustee a pledgee may sell the object of a securityover movables


If a creditor had the right to set off the claim thereof against the claim of the debtor before thedeclaration of bankruptcy the creditor may set off the defended claim also after the declaration ofbankruptcy

Set-off is not permitted if the debtor acquires a claim against the creditor after bankruptcy is declared(eg in case the economic activities of the debtor are carried on or if the debtor buys bankruptcy estate)

A claim acquired through assignment may be set off in bankruptcy proceedings only if the claim wasassigned and the debtor was notified of the assignment in writing no later than three months before thedeclaration of bankruptcy A claim against the debtor which is acquired through assignment may not beset off if the claim was assigned within the preceding three years before the appointment of an interimtrustee and the debtor was insolvent at the time of the assignment and the person who acquired the claimwas or should have been aware of the insolvency at the time of the assignment This restriction is aimedat preventing combinations through which the situation of creditors who do not have the option of set offis worsened by set off


No


No

84


The establishment of a bankruptcy committee is decided by a general meeting of creditors In case abankruptcy committee is established a general meeting of creditors decides the number of the membersof a bankruptcy committee and chooses its members If a general meeting of creditors decides not toestablish a bankruptcy committee the general meeting will fulfill its duties

The main duty of a bankruptcy committee is to exercise supervision over the activities of the trustee Itperforms also other tasks arising from law Mostly it involves granting different approvals Forexample a trustee may conclude transactions with special relevance to the bankruptcy proceedings onlywith the consent of the bankruptcy committee If a general meeting does not issue a precept to the trusteebut the trustee finds that sale of the bankruptcy estate without an auction would be more profitable theestate may be sold without an auction in a more profitable manner with the consent of the bankruptcycommittee A trustee may sell an enterprise or an organisationally independent part of an enterprise onlywith the consent of the bankruptcy committee Payments are made on the basis of the distribution ratiowith the consent of the bankruptcy committee

Bankruptcy committee may also be asked for an opinion For example the court determines theremuneration of a trustee having also heard the opinion of the bankruptcy committee



The trustee leads the debtor in bankruptcy proceedings and organizes continuation of the businessactivities of the debtor Trustee has the rights and duties of a board member Continuance of the debtor isdecided by the first general meeting of creditors In order to make transactions outside the regularbusiness activities of an undertaking the consent of the bankruptcy committee is required

In reorganization proceedings the debtor can manage and dispose of his assets himself but he mustcomply with the reorganization plan A reorganization adviser exercises supervision over theimplementation of the reorganisation plan A reorganization adviser submits at the end of every sixmonths to the creditors and the court a report which describes the economic position of the enterpriseimplementation of the reorganization plan and other relevant facts which the creditors may have interestin The court may impose supplementary obligations on a reorganization adviser upon exercise ofsupervision


In the event that it is decided that the economic activities of the debtor are continued it is presumed thatfunds will be obtained through these economic activities It is common that in order to continueeconomic activities of the debtor a loan is taken In such a case the obligation to return the loan isdeemed to be a consolidated obligation with respect to which payments are made before the claims ofcreditors are satisfied


Estonia does not have DIP funding However if a loan is taken in a debtoracutes bankruptcy proceedings theobligation to return the loan is deemed to be a consolidated obligation with respect to which paymentsare made before satisfying the claims of creditors A debtor may be required to perform a consolidatedobligation in bankruptcy proceedings on a general basis

85


An employee of the debtor also a former employee who has resigned within the preceding two yearsbefore the filing of the bankruptcy petition is required to provide the court the trustee and the bankruptcycommittee with information which they need in connection with the bankruptcy proceedings particularlyconcerning the assets including obligations and the business or professional activities of the debtor

If the economic activities of the debtor are continued the obligation to pay remuneration to employees isregarded as a consolidated obligation which must be performed before satisfying claims of creditorsPerformance of consolidated obligations may be required pursuant to the general procedure

Employer may cancel an employment contract extraordinarily upon declaration of bankruptcy ortermination of bankruptcy proceedings by abatement of bankruptcy proceedings without declaration ofbankruptcy

Upon insolvency of an employer the Estonian Unemployment Insurance Fund compensates to anemployee on the basis of an application submitted by the bankruptcy trustee or interim trusteeunreceived salary from the period before the declaration of the employer as insolvent (in the amountequal to up to the employees gross wages for the last three months of work but not exceeding in totalthe amount equal to three average gross monthly wages in Estonia) unreceived holiday pay from theperiod before the declaration of the employer as insolvent (in an amount to the extent of the employeesone gross monthly wage but not exceeding the amount equal to one average gross monthly wage inEstonia) and benefits from the period before or after the declaration of the employer as insolvent whichwere not received at the time of cancellation of the employment contract but which were prescribed bythe Employment Contracts Act (in the amount equal to up to the employees two gross monthly wagesbut in total not exceeding the amount equal to one average gross monthly wage in Estonia)


As a general rule a trustee has the right to perform an unperformed obligation arising from a contractentered into by the debtor and require the other party to perform the obligations thereof or abandonperformance of an obligation arising from a contract entered into by the debtor There are howeverexceptions to this rule For instance if a debtor has sold a movable with reservation of ownershipbefore declaration of bankruptcy and has transferred possession of the movable to the purchaser thepurchaser has the right to require performance of the sales contract In such case the trustee may notabandon performance of the debtors obligations arising from the sales contract The bankruptcy of alessor or a commercial lessor is not the basis for termination of the lease contract unless the contractprovides otherwise

It must be noted that in recovery the court may revoke transactions which were concluded or other actswhich were performed by the debtor before the declaration of bankruptcy and which damage theinterests of the creditors If a court revokes a transaction by way of recovery procedure the other partyis required to return the proceeds of the transaction to the bankruptcy estate together with the fruits andother gain If the other party to a recovered transaction has transferred something to the debtor on thebasis of the transaction it has to be returned to the party or if return is impossible the value of thatwhich was transferred has to be compensated for If the other party to a transaction knew or should haveknown at the time of entry into the transaction that the transaction damages the interests of othercreditors the other party may demand compensation for that which was transferred to the debtor only asa creditor in the bankruptcy proceedings

86



A trustee is notified of a claim by a written petition (proof of claim) The proof of claim must set out thecontent basis and amount of the claim and whether the claim is secured by a pledge Documents provingthe circumstances specified in the proof of claim shall be annexed thereto


Claims are to be filed no later than within two months as of the date of publication of the bankruptcynotice in the official publication Ametlikud Teadaanded A court immediately publishes a bankruptcynotice after declaration of bankruptcy A bankruptcy notice sets out the term for filing the claims and theconsequences of failure to file a claim within the specified term

The two-month term for filing claims is not absolute If a claim is filed after expiry of the two-monthterm with good reason the general meeting may restore the term for filing the claim at the request of thecreditor In such case the claim is deemed to be filed within specified term If a claim is not filed withinthe specified term and the term for filing a claim is not restored the claim may be defended but in thecase of acceptance the claim will be satisfied after satisfaction of the accepted claims which were filedon time

A claim cannot be filed after the distribution proposal has been submitted to the court for approval


Rankings of creditorsacute claims

(i) accepted claims secured by a pledge To the extent of the money received from the sale of thepledged object from which payments relating to the bankruptcy proceedings made before payment ofmoney on the basis of distribution ratios in proportion to the ratio of the amount of money received fromthe sale of the pledged object to the total amount of money received from the sale of the bankruptcyestate but no more than 15100 of the amount of money received from the sale of the pledged objecthave been deducted If a claim secured by a pledge is not satisfied in full out of the money received fromthe sale of the bankruptcy estate the rest of the claim is satisfied together with the claims of the nextranking

(ii) other accepted claims which were filed within the specified term

(iii) other claims which were not filed within the specified term but were accepted

Are there other complex issues arising by virtue of the insolvency for example an insolvency officerprescribed method for claims filing

No



There are no cram-down procedures stipulated in the Bankruptcy Act

87

In reorganization proceedings a court may approve a reorganization plan also when creditors are againstit If the reorganization plan complies with the law a court appoints two experts to analyze thereorganisation plan A court approves a reorganization plan which has not been accepted by creditors ifaccording to the experts the reorganization of the undertaking is likely to succeed on the basis of thereorganization plan no creditor is treated substantially less favourably as compared to other creditorsor as compared to other creditors belonging to the same group and in the case of an importantundertaking who is an important employer Although the ruling by which the reorganization plan hasbeen approved or the approval of the reorganization plan has been refused may be appealed it may stillbe said the foregoing constitutes essentially a cram-down procedure in reorganization proceedings


Bankruptcy proceedings terminate with the liquidation of the undertaking or by approval of acompromise The first general meeting of creditors decides whether bankruptcy proceedings are aimedat liquidating or rehabilitating the company Bankruptcy proceedings usually have a liquidating naturerehabilitation of an undertaking is very rare

At the end of the liquidating bankruptcy proceedings the bankruptcy trustee submits a final report to thecourt A final report sets out information concerning the bankruptcy estate and the money received fromthe sale thereof payments activities of the trustee accepted claims of creditors expenses and othercircumstances relevant to the bankruptcy proceedings Also a trustee has to set out in the final reportwhether insolvency was caused by an act with criminal elements a grave error in management or othercircumstances and whether the trustee has submitted a petition for the commencement of criminalproceedings A court approves the final report by a ruling A company is liquidated by the trustee Acompany terminates as of its deletion from the commercial register

In rehabilitating bankruptcy proceedings a compromise is made at a general meeting of creditorsconcerning all claims against the debtor A trustee immediately submits a compromise decision to thecourt for approval The court decides on the approval of the compromise by a ruling A court rulingapproving a compromise terminates the bankruptcy proceedings On the basis of the ruling the debtorrecovers the right to administer his or her assets and the sale of the assets will be terminated Moneyreceived from the sale its of the assets which has not been transferred to creditors will be transferred tothe debtor

Reorganization proceedings terminate upon expiry of the term for implementation of the reorganizationplan or implementation of the reorganization plan before the due date A court may terminatereorganization proceedings prematurely on grounds stipulated in law also revoke the reorganizationplan


There is no official statistics about the effectiveness of bankruptcy proceedings The most informativeresearch about the effectiveness of bankruptcy proceedings has been carried out in 2004

Approximately 73 of the bankruptcy proceedings of undertakings declared insolvent in 2004 weresuch where creditors received nothing

The average percentage of payments in proceedings where a distribution proposal was approved wasabout 18 Still most of the payments were payments made to pledgees ndash about 89 of the securedclaims were satisfied Payments to creditors of the main ie second ranking were made in average tothe extent of 4 of the claims they defended

88

Although the data of the research is outdated there is no reason to believe that the indicators ofefficiency of bankruptcy proceedings have changed significantly in the meantime Pledgees have a goodposition in bankruptcy proceedings but payments made to creditors in the second rank are very smallcompared to the claims they defended



No Bankruptcy proceedings and reorganization proceedings are both formal proceedings A companyhowever has the possibility to negotiate privately with the creditors


No



The Council Regulation (EC) No 13462000 on insolvency proceedings is applicable


If the center of the main interests of a company (COMI) within the meaning of recitals 12 and 13 of thepreamble to Regulation 13462000 is in a EU member state (except Denmark) the insolvencyproceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

Secondary insolvency proceedings commenced by a court of another member state are recognized incase Estonian company has its establishment in that state within the meaning of Article 2(h) of theRegulation 13462000

If a decision on declaration of bankruptcy with respect to an Estonian company is made in Denmark orsome other country that is not a member of the EU the decision will be recognized pursuant to theEstonian Code of Civil Procedure As a rule a foreign court decision will be recognized in Estoniaexcept in some cases provided by law A court decision will not be recognized if doing so would bemanifestly contrary to important principles of Estonian law (public policy) particularly to fundamentalrights and freedoms of a person also if the debtor was unable to reasonably protect its rights or if thedecision is irreconcilable with a decision given in a dispute between the same parties in the same matterin Estonia or a recognized decision or a foreign decision that is recognized in Estonia

89

Finland

Ville Ahtola Counsel Castreacuten amp Snellman Attorneys Ltd

wwwcastrenfi email villeahtolacastrenfi tel +358 (0)20 7765 447



The most common types of security that can be taken over assets are mortgages floating charges andpledges

Mortgages can be taken over immovable property and some forms of movable property includingcertain motor vehicles aircrafts and ships

A floating charge is a specific type of mortgage where a companyrsquos fluctuating assets such as its tradingstock are pledged as security for a specified claim As control of the assets is not transferred to thecreditor the debtor is free to dispose of them without obtaining the creditorrsquos consent The creditorreceives one or more mortgage bonds as proof of its security interest over the debtorrsquos assets If thedebtor defaults the creditor has the right to receive preferential payment from the sale proceeds of theassets subject to the floating charge (when these assets are sold either within the insolvency proceedingsor as part of a sale of the business)

A pledge can be given by the debtor or a third party able to transfer title over almost any definableproperty which acts as security for a specified claim If the debt is not discharged when due thecreditor has the right to receive preferential payment from the sale proceeds of the pledged property


According to the Act on the Recovery to the Bankruptcy Estate (7581991) a transaction concludedprior to the commencement of the bankruptcy proceedings may be recovered to the bankruptcy estateRegardless of the name of the Act in addition to bankruptcy proceedings the Recovery Act is applied torestructuring proceedings Since the purpose of the Act is to ensure equality among creditors and preventthe debtor of privileging one of the creditors at the expense of the others any kind of proceedingsarrangements or measures taken may be recovered if the conditions set out in the Recovery Act are met


The Finnish Companies Act (6242006) does not set any obligation for the board of directors to file forbankruptcy or restructuring of the company even in situations where the company is excessively indebtedor insolvent The company may continue its business operations but the board of directors has to bediligent in order to avoid criminal liability andor liability for damages

The directors and the managing director are personally liable to the company a shareholder or a thirdparty where damage or loss has resulted from a breach of the provisions of the Companies Act or thecompanyrsquos articles of association

There are also certain provisions in the Criminal Code regarding offences by a debtor such as

90

dishonesty by a debtor and favouring a creditor

2 Taking action


The formal insolvency procedures available in Finland for companies are bankruptcy and restructuring

Bankruptcy is an insolvency procedure that covers all the liabilities of the debtor where the assets ofthe debtor are used in payment of the claims in bankruptcy In order to achieve the objective ofbankruptcy the assets of the debtor shall in the beginning of bankruptcy become subject to the authorityof the creditors An estate administrator appointed by the court shall see to the management andliquidation of the assets of the debtor and to the other administration of the bankruptcy estate

Restructuring of Enterprises is an insolvency procedure the purpose of which is to rehabilitate adistressed debtorrsquos viable business to ensure its continued viability and to achieve debt arrangementsIn the proceedings a court will approve a restructuring programme which includes measures on theactivities assets and liabilities of the debtor

The scope of this report only covers restructuring proceedings not bankruptcy proceedings


Voluntary restructuring The aim of voluntary restructuring is generally the same as that of formalrestructuring proceedings Voluntary restructuring involves arrangements made between a company andits creditors with the goal of avoiding bankruptcy It can be used for the same purposes as formalrestructuring ie not only to reorganize a companyrsquos debts but also its business branches capitalstructure and etc Voluntary restructuring only works if the creditors have sufficient confidence in thecompanyrsquos viability


Voluntary restructuring is usually considered as a creditor-friendly procedure since the creditors havemore power in a voluntary restructuring in comparison to formal restructuring

The formal restructuring procedure is extensively regulated which makes it more debtor-friendly Thegoal of the procedure is to rehabilitate a distressed debtorrsquos viable business or to ensure its continuedviability and to achieve debt arrangements In formal restructuring it is also possible to cut the debtcapital which naturally improves the debtorrsquos standing


A debtor is considered to be insolvent when it is otherwise than temporarily unable to repay his or herdebts as they fall due The inability to pay ones debts must be more than temporary

The prerequisites for restructuring are that at least two creditors whose total claims represent at leastone fifth of the debtorrsquos known debts file a joint application with the debtor or declare that they supportthe debtorrsquos application or the debtor faces imminent insolvency or the debtor is insolvent

However the debtor is not eligible for restructuring if the debtor is insolvent and it is probable that therestructuring programme will not remedy the insolvency or prevent its recurrence it is probable that the

91

debtorrsquos assets are not sufficient to cover the costs of the restructuring proceedings and no one else hasundertaken to cover these costs it is probable that the debtor will not be able to repay debts arising afterthe commencement of the proceedings In addition the procedure may not be commenced if there isjustifiable reason to believe that the primary purpose of the application is to prevent a creditor fromcollecting on his or her claim or there is justifiable reason to believe that the necessary conditions forthe preparation or approval of a restructuring programme for the debtor do not exist or the debtorrsquosbooks are materially incomplete or erroneous


A restructuring matter shall be filed with a petition Only courts specifically referred to in theRestructuring of Enterprises Act have jurisdiction over restructuring matters

When the petitioner is the debtor a statement on the creditors the debts and their collateral as well ason the state of its finances shall be appended to the application If the debtor has not filed the applicationtogether with the creditors and the creditors have not supported the application the debtor shall providea statement on the main reasons for its financial difficulties the prospects for the continuation of itsactivities the funds needed to cover the costs of the restructuring proceedings and the means by whichthe debtor is to repay its debts other than restructuring debts


The application for restructuring procedure may be filed by the debtor a creditor or several creditorstogether The debtor and the creditors may also file a joint application


The court shall appoint an administrator who shall be nominated by either the debtor or the creditor

The court issues the order on the commencement of restructuring proceedings In addition it shallappoint a committee of creditors set a date by which the creditors must declare their claims in writingto the administrator if these claims differ from those reported by the debtor set a date by which theadministrator must serve the report on the financial situation of the debtor on the parties to the matter seta date by which the draft restructuring programme is to be prepared

The court shall give an order either on the approval of the restructuring programme or on the terminationof the proceedings without approval of the restructuring programme


The proceedings usually take about 8-12 months but expedited proceedings can be carried throughrather rapidly ie few months Implementing the restructuring plan may take approximately three to tenyears


The court order on the commencement or termination of the restructuring proceedings on an interiminterdiction or on restrictions on the competency of the debtor shall be publicly announced and notifiedto certain authorities as well as entered into the trade register as well as in various property registersand the register of mortgages


In comparison to bankruptcy procedure in which the debtor loses control of the assets to the creditors

92

in restructuring the debtor remains in control of the business throughout the procedure However thedebtor may need permission from the administrator to conduct certain transactions The debtor will beable to continue business activities normally regardless of the restructuring proceedings The debtorrsquosliquidity also increases as funds still come in to the business but the creditors are not allowed to collectthe debts during the planning stage of restructuring


In Finland the debtor in possession principle is applied during restructuring proceedings The debtorrsquosauthority to conduct transactions is limited to some extent due to the fact that the debtor may need theadministratorrsquos approval for certain transactions


There are no means provided in the restructuring legislation to replace the management of a companyagainst the companyrsquos ownerrsquos wishes However the creditorsrsquo view must be taken into account as theyare the ones whose acceptance is needed for the restructuring programme Therefore in practice thecreditors can have an influence in replacing the management

It is noteworthy that all types of businesses are not easily restructured Larger businesses are easier torestructure and for instance holding companies would be very difficult to restructure without forinstance simultaneously restructuring a group of company with the business operations

When evaluating the survival of companies which have gone through restructuring proceedings in a fiveyear time scale approximately half have in reality proved to be unfit for the restructuring proceedings


There are no political factors which may come into play in a restructuring procedure

3 Creditor issues


Once the proceedings have commenced the debtor shall not repay restructuring debts or providesecurity for such debts However a payment may be made on the decision of the administrator tocreditors who have small claims if this is appropriate from the point of view of the proceedings

The debts that arise after the filing of the application must be paid as they fall due


The commencement of restructuring proceedings triggers an interdiction of debt collection and thisinterdiction also affects to real security rights The interdiction of debt collection means that nomeasures shall be directed at the debtor in order to collect a restructuring debt As regards real securityrights also the exercise of rights of liquidation or recovery based on real security rights and otherutilization of security in order to obtain payment falls within the sphere of this interdiction

The debt arrangement shall not affect the existence or content of a creditorrsquos real security rightNonetheless in the debt arrangement the security arrangements relating to the debt may be altered byreplacing the security with other fully adequate security The status of secured debts is safeguarded so

93

that with regard to secured debts a reduction in the balance of the unpaid debt is prohibited With regardto secured debt it is also prohibited to incorporate the full or partial refinancing of the debt withsubstitute performance that is reasonable in view of the creditorrsquos field of activities and status

Furthermore payments on a secured debt shall be set so that at least the present value of the secureddebt will be repaid within a reasonable period not to materially exceed the remainder of the creditperiod without the consent of the creditor or if the debt has become due in full not to materially exceedone half of the original credit period


According to the Restructuring Act during the restructuring proceedings a creditor shall have the rightto set a claim off against a debt owed to the debtor at the commencement of the proceedings under thesame conditions as in bankruptcy proceedings The set-off notice shall also be served on theadministrator

The Act further provides that if a debt owed by a creditor other than a secured creditor becomes due ona fixed date after the date when the interdiction of debt collection takes effect the creditor shall have theright to withhold payment to an amount corresponding to the claim from the debtor so that the debtrelationship otherwise continues otherwise with the same terms until the set-off is effected or theinterdiction of debt collection ends

Furthermore for a credit institution it is prohibited to set-off funds that the debtor has on deposit at theinstitution when the interdiction of debt collection takes effect or thereafter or funds that are at the creditinstitution at that time for transfer into the debtorrsquos account where the account is used for payments


The intra-group debts are in the comparable position with other debts Provisions concerning thecreditor recourse are the same with regard to company affiliates


On the request of the applicant the administrator or a creditor the court shall appoint a committee ofcreditors as the joint representative of the creditors unless this is to be deemed unnecessary owing tothe small number of creditors or some other reason The committee of creditors shall have at least threemembers The composition of the committee of creditors shall be determined so that various groups ofcreditors such as secured creditors and creditors whose claims have a similar basis are equallyrepresented

The duties of the committee of creditors as an advisory body are to assist the administrator in theperformance of his or her duties and to monitor the activities of the administrator on the behalf of thecreditors In order to perform their duties the committee of creditors and its members are entitled asnecessary to obtain information from the administrator concerning the debtorrsquos books businesscorrespondence and other business documents and data files



Once the proceedings have commenced the court shall appoint an administrator who shall supervise the

94

day-to-day activities and interests of the creditors During the restructuring procedure the officers of thedebtor remain in control of and continue to operate the business in the usual way but under thesupervision of the administrator who assesses the debtorrsquos financial situation and safeguards theinterests of creditors


With regard to liquid assets cash cash receivables outstanding loans and accounts receivables forinstance are considered as such assets Restructuring proceedings shall not be commenced if it isprobable that the debtorrsquos assets are not sufficient to cover the costs of the restructuring proceedings andno one else has undertaken to cover these costs Since the law does not provide that the expenses arecovered immediately but in the long term the assets of the debtor do not necessarily need to be in cashor other liquid assets Thereby some of the expenses may be covered for instance with future cash flowfinancing


On the application of the administrator the court may order that debt taken during the proceedings andspecified in the order has the same or a higher priority than a restructuring debt in respect of property ofthe debtor that stands as collateral for both debts It shall be a precondition for this that the arrangementis necessary to secure financing during the proceedings and that it does not significantly increase the riskof those creditors whose priority position would be weakened Such an arrangement shall not affect theposition of said creditors as secured creditors


When restructuring proceedings begin a shorter notice period than in normal cases is applied toemployment agreements The termination of employment agreements in case of restructuring is governedby the Finnish Employment Contracts Act (552001)

Firstly according to Employment Contracts Act if the employer is subject to a restructuring procedurethe employer shall be entitled to terminate the employment contract regardless of its duration at a noticeof two months if the termination derives from an arrangement or measure to be carried out during therestructuring procedure which is necessary to avoid bankruptcy and which causes the work to cease ordecrease However the employer shall not have the right to terminate the employment contract if theemployer can offer the employee work that is equivalent to that defined in the employment contract orwork equivalent to the employeersquos training professional skill or experience

Secondly the employer shall be entitled to terminate the employment contract regardless of its durationat a notice of two months if the termination derives from a procedure in accordance with a confirmedrestructuring plan that causes the work to cease or decrease or if the termination derives from anarrangement in accordance with the plan which is attributed to financial grounds established in theconfirmed restructuring plan and calls for a reduction in personnel resources

The employee shall observe a notice period of 14 days in connection with restructuring proceduresHowever during a lay-off employees are entitled to terminate their employment contract without noticeregardless of its duration If the date when the lay-off ends is known by the employee this right shall notapply for seven days preceding the end of the lay-off period


Generally speaking the commencement of restructuring proceedings shall have no effect on the existingundertakings of the debtor The initiation of the restructuring procedure under the Restructuring of

95

Enterprises Act also has no effect of terminating contracts with the debtor either and during therestructuring procedure the debtors business activities continue in the normal way However the debtorhas a right to terminate a lease or a credit-lease agreement where the debtor is the lessee to come to anend two months after the notice of the termination The procedure also includes a suspension of interestaccruing on overdue amounts to creditors


When the court issues the order on the commencement of the restructuring proceedings it will set a dateby which the creditors must declare their claims in writing to the administrator if the claims differ fromthose reported by the debtor The notifications are collected by the administrator Normally thesenotifications are to be collected within two months from commencement of insolvency proceedings

The court reserves the parties an opportunity to declare in writing to the administrator their objections toclaims

A restructuring debt that has not been declared by the debtor or by the creditor and which has otherwisenot come to the attention of the administrator before the approval of the restructuring programme shalllapse on the approval of the restructuring programme unless otherwise provided in the programmeHowever the debt shall not lapse if the creditor did not know and ought not to have known of it and ithad not come to the attention of the administrator before the approval of the programme


In restructuring proceedings the debts rank as follows (Act on the Ranking of Claims (19921578))

1 Claims secured by a lien or collateral right of retention or a legally registered encumbrance on thecompanyrsquos property

2 Claims based on costs incurred during corporate restructuring proceedings

3 Claims secured by floating charge (business mortgages up to 50 of the value of the assets subject toa floating charge)

4 Unsecured claims

Claims involving interests accrued after insolvency proceedings have commenced capital loans giftsand certain fines as well as shareholders receive payment based on their ownership in the company onlyif any assets remain after all other creditors have been paid in full


In practice obscurities in bookkeeping for instance may result in trouble with regard to theadministratorrsquos tasks in restructuring proceedings especially when settling the creditorsrsquo claims



96

A similar loan modification to the cram-down procedure also exists in the Finnish insolvency system Itis provided in Section 44 on methods of debt arrangement of the Restructuring Act It providesfollowing methods to arrange the debts

i A change of the payment schedule of a debt

ii An order that payments made by the debtor shall first be considered as payments against the balanceof the debt and only later as payments against credit costs

iii A reduction in the obligation to pay credit costs relating to the remaining credit period

iv A reduction in the balance of the unpaid debt

However the reduction in the balance of the unpaid debt and substitute performance as debtarrangements may not be applied to a secured debt


The possible debt arrangements are presented in the restructuring programme The administrator shallprepare a draft restructuring programme and submit it to the court

The court shall approve the draft restructuring programme if the conditions set to the approval are metThe restructuring programme may be approved if all of the known creditors or a majority in each of thegroups of creditors accepts the same Even if the programme is not approved by the majority of thedebtors in each group the restructuring programme may nonetheless be approved at the request of theperson who had prepared the draft the administrator or the debtor on certain conditions


Unless the program is approved by all of the known creditors the person presenting the draft shall alsopropose how the creditors are to be divided into groups which shall be as follows

i secured creditors

ii creditors holding a floating charge as security for their claims

iii others than secured creditors so that one group is formed by creditors whose claims may beenforced without a judgment or court order as provided in the Act on the Collection of Taxes and PublicCharges by Enforcement (3671961 laki verojen ja maksujen perimisestauml ulosottotoimin)

iv creditors with lowest-priority claims in accordance with section 6 of the Act on the Ranking ofClaims so that the groups are formed in accordance with the priority order of such claims



As mentioned above voluntary restructuring based on voluntariness is a possibility in Finland


Yes the Office of Bankruptcy Ombudsman has given guidelines regarding the accelerated restructuring

97

procedure



The Council Regulation (EC) No 13462000 on Insolvency Proceedings


According to the article 3 of the EC Regulation No 13462000 the courts of the Member State within theterritory of which the centre of a debtorrsquos main interests is situated shall have jurisdiction to openinsolvency proceedings The law applicable to insolvency proceedings and their effects shall be that ofthe Member State within the territory of which such proceedings are opened

Any judgment opening insolvency proceedings handed down by a court of a Member State which hasjurisdiction pursuant to Article 3 shall be recognized in all the other Member States from the time that itbecomes effective in the State of the opening of proceedings The judgment opening the proceedingsshall in general with no further formalities produce the same effects in any other Member State asunder this law of the State of the opening of proceedings

98

France

Remi Turcon Partner Alister Avocats

wwwalister-avocatscom email remiturconalisternet tel (33+1) 70 92


How might a creditor take over security assets

Typically the creditor will take security by way of either (i) a retention of title provision or (ii) a chargeover the debtorrsquos assets

The charge over the debtorrsquos assets may include

(i) A pledge against the business assets as an ongoing concern (French concept of ldquofonds decommercerdquo)

(ii) A pledge against one specific asset (tool machinery etchellipexcluding inventory)

(iii) A mortgage against a real estate asset


Any transactions including securities granted to a creditor entered into by a company in difficulty duringthe so-called ldquosuspicious periodrdquo (ldquopeacuteriode suspecterdquo) are automatically null and void or could bevoided

The suspicious period starts from the date of suspension of payments fixed by the judge on a case-by-case basis in the judgment until the date of the judgment


Directors have a duty to act in the interest of the company and creditors when a company is facinginsolvency or is insolvent Their personal civil liability may only be engaged in case of grossnegligence their personal criminal liability may also be engaged in case of fraud and fraudulentbankruptcy

2 Taking action


The Court must be satisfied that the company is in a state of suspension of payments (ldquosuspension despaiementsrdquo) this is generally the case when the company is unable to pay its debts with its existingassets

What informal procedures are available to the company

99

The main procedures available to the company are

(i) Safeguard procedure (ldquoprocegravedure de sauvegarderdquo)

The safeguard procedure is available when the company is not in a state of suspension of payments butis in a state of insurmountable difficulty

(ii) Receivership procedure (ldquoprocegravedure de redressement judiciairerdquo)

The receivership procedure is available when the company is in a state of suspension of payments thisprocedure allows the company to continue its business activities retain employees and clear its debts aplan is ordered by judgment after an observation period

(iii) Liquidation procedure (ldquoprocegravedure de liquidation judiciairerdquo)

When a debtor is in a state of suspension of payments without any alternative solutions a liquidationprocedure may be started against the debtor


The safeguard and receivership procedures are debtor-friendly


The state of suspension of payments is the trigger for the receivership procedure


An application for any of the above procedures needs to be filed with the President of the CommercialCourt where the company is registered


Any legal representative of a company may place the company in any of the three above-mentionedinsolvency proceedings

Any creditor of a company the Attorney-Generalrsquos office or the Court itself may also place the companyin receivership or liquidation procedures

What is the extent of Court involvement

The Court rules on the opening of the safeguard procedure and approves any safeguard plan which maybe agreed by and between the company and the creditors

The Court rules on the opening of the receivership procedure determines the suspension of paymentsdate appoints all bodies of the procedure (receiver creditorsrsquo representative supervisory judge)oversees the entire receivership procedure approves the continuation plan and any shares or assetssales decides on the end of the receivership procedure or the transformation into a liquidationprocedure

The Court rules on the opening of the liquidation procedure determines the suspension of payments dateappoints all bodies of the procedure (liquidator creditorsrsquo representative) oversees the liquidationprocedure and rules on the liquidation of the company


100

The observation period in the context of a safeguard or receivership procedure is generally 6 monthsmaximum but in exceptional circumstances can be renewed for 6 months maximum


Safeguard receivership and liquidation judgments are automatically published in the BODACC officiallegal announcement journal


The receivers as well as the supervisory judge (as applicable) have the right to require the continuationof any ongoing contract at the time of the judgment regardless of any provision to the contrary that mayhave been inserted in the contract

The payment of all debts borne prior to the date of the judgment opening as insolvency proceeding issuspended


As already stated the receiver as well as the supervisory judge (as applicable) have the right to requirethe continuation of any ongoing contract at the time of the judgment regardless of any provision to thecontrary that may have been inserted in the contract This rule is a rule of public policy in France


There are in theory no political factors which may come into play

3 Creditor issues


Debts are paid in the following order

(i) debts borne following the date of the opening judgment

(ii) ldquosuper privilegedrdquo creditors including

a employees

b legal fees and costs incurred after the date of the opening judgment necessary for the unfolding of thebankruptcy proceeding

c French State and French social security bodies

(iii) secured creditors

(iv) all other unsecured creditors are treated on an equal basis


A secured creditor might enforce its security in line with the above information

101

A secured creditor holding a security interest in a specific asset will prevail against

a secured creditor holding a security in the general business assets as an

ongoing concern

Are there prevailing intercompany debt issues

Intercompany debt is treated in the same way as an unsecured creditor


Creditor recourse is not available in respect of any company affiliates unless the bankruptcy proceedingis extended to the affiliate company


All creditors are represented by the creditorsrsquo representative appointed by the Court



The company is managed by the existing companyrsquos directorsmanagerpresident (as the case may be) ina safeguard or receivership procedure However they may need the receiverrsquos or the supervisoryjudgersquos consent to enter into some management decisions

The company is managed by a Court-appointed liquidator in a liquidation procedure


The company is usually financed by the revenues generated by the company and by the proceeds of thesale of any of the companyrsquos assets


Employees are usually represented by their own representatives who are elected at the beginning of thebankruptcy proceeding


Please read our answer above


Any debt borne prior to the date of the opening judgment is subject to the filing of a claim This claimmust be made by the creditor of any duly-appointed representative with the creditorrsquos representative orthe receiver (as the case may be) appointed by the Court

There is no prescribed form for the filing of a claim but it is highly advisable to send it by registeredmail with return receipt requested


102

The declaration must be filed within 2 months from the date of the publication of the bankruptcyjudgment in the BODACC official announcement journal

This limit is increased by 2 months for creditors domiciled outside Metropolitan France in Frenchoverseas departments or territories or in foreign countries



Are there other complex issues arising by virtue of the insolvency for example an insolvency officerprescribing methods for claims filing

Creditors who have not filed their claim in the allowed time limit are barred from making any claim










Are there other complex issues arising by virtue of the insolvency for example an insolvency officer prescribing methods forclaims filing




The Court issues a judgment to formally conclude the bankruptcy proceeding

103


Creditors will be paid in the order laid out above and according to the financial resources available tothe company Since unsecured creditors are treated on an equal basis they will be paid their debt prorata provided of course enough cash is available



No other non-formal procedure is available


No other accelerated process is available



European bankruptcy proceedings may be available


Bankruptcy judgments of foreign companies from other European Courts are automatically recognised inFrance

Bankruptcy judgments of foreign companies from non-European Courts must be recognized by a FrenchCourt (ldquoexequaturrdquo procedure)

104

Germany

Dr Timo Alte Partner Christian Aufdermauer Associate Haver amp Mailaumlnder Rechtsanwaumllte

wwwhaver-mailaenderde email tahaver-mailaenderde tel +49 (0) 711 22744-14



A creditor may secure his receivables vis-agrave-vis the debtor by mortgaging or pledging the debtorrsquosassets by pledging the debtorrsquos receivables or by agreement on reservation of title concerning the goodsdelivered to debtor

If the transaction between the creditor and the debtor has already been made when the financialdifficulties of the debtor occurred the creditor may ask the debtor to grant securities for its alreadyexisting receivables However any securities granted by the debtor during a certain time-period(generally up to three months) before the filing for insolvency might be challenged by the insolvencyadministrator later on


Transactions entered into by the debtor within a certain time-period before the filing for insolvency arevulnerable to challenges by the insolvency administrator The time-period varies from 1 month up toseveral years depending on the motive and the participants of the transaction


A director might be liable to creditors when he did not file for insolvency without undue delay withinthree weeks after the company became bankrupt at the latest A director might furthermore be liable tothe company if he performed transactions after the company has become bankrupt or if he was trading inabsence of proper consideration A director might as well be liable if he undertakes payments toshareholders while in distress thus causing bankruptcy

In addition there is always a risk of criminal liability if the director fails to properly and timely file forinsolvency or undertakes to disadvantage of creditors

2 Taking action


Companies may be subject to regular insolvency proceedings The companyrsquos right to manage andtransfer the insolvency estate is being vested in the insolvency administrator The company will eitherbe continued or liquidated in favour of the creditors

Companies may as well be subject to personal management proceedings Thus the company maymanage and dispose of the assets involved in insolvency proceedings itself under the supervision of a

105

custodian Nevertheless the objectives of such proceedings remain for the satisfaction of the creditors

Furthermore a companyrsquos insolvency may be settled in an insolvency plan The regulations of theinsolvency plan principally substitute the statutory regulations of the German Insolvency Act Theestablishment of an insolvency plan should nevertheless be regarded as a formal procedure whichrequires the approval of the creditorsrsquo assembly


Informal procedures do not exist A debtor could always reach arrangements with its creditors to sort itsdebts However no private arrangement may ever prevent any creditor from filing for insolvency or toexecute binding rulings against the debtor


In principal any insolvency proceedings are creditor-friendly because the purpose of such proceedingsis the collective satisfaction of the debtors creditors However there are possibilities for self-management and establishment of an insolvency plan In these cases the debtor has some more influencethan in ldquousualrdquo insolvency proceedings


General trigger for insolvency is illiquidity what is the case if the debtor is unable to meet his matureobligations to pay

If the debtor filed for insolvency imminent illiquidity suffices as a reason to commence insolvencyproceedings

Overindebtedness may trigger insolvency for corporations what is principally the case if the debtorsassets no longer cover his existing obligations to pay and going concern is not likely


Insolvency proceedings require a written request Such request may be filed by the creditors or by thedebtor itself

A creditors request is admissible if the creditor has a legal interest in the commencement of theinsolvency proceedings what is the case if he shows his claim and the reason why insolvencyproceedings should be commenced to the satisfaction of the court

A debtor has to add a list containing at least all known creditors and their respective receivablesAdditional information regarding for example social securities and pensions of the employees ought tobe added If a debtor wishes to apply for self-management proceedings this has to be indicated in thefiling




The most important decision by the court is the appointment of the insolvency administrator In additionthe court decides on commencement of the insolvency proceedings and has to be involved in critical

106

decisions such as the confirmation of an insolvency plan or the termination of the insolvencyproceedings Most responsibility lies with the insolvency administrator who has to manage the insolventcompany and to liquidate its assets


There is no given time frame It is not unlikely for insolvency proceedings of companies to take up to 3to 4 years or even longer depending on the size of the insolvent company the numbers of creditors andthe possibilities to find an investor for the insolvent company





Upon the commencement of the insolvency proceedings the debtors right to manage and transfer theinsolvency estate will be vested in the insolvency administrator However during insolvency creditorsprincipally may not execute into the insolvency estate or into the debtors other property


A standard personal management process pursuant to German insolvency law will obviously notresemble the debtor in possession process as the debtor remains obliged to do his very best to satisfythe creditors even by liquidating the company However a new law has been introduced in Germanyallowing a debtor personal management and protection for up to three months in order to prepare aninsolvency plan restructuring the distressed company Probably this process might resemble the debtorin possession process to some extent but even in this case he is supervised by a custodian appointed bythe court


No


In the past there have been efforts by the government to assist distressed companies in order tosafeguard jobs This attitude has changed recently

3 Creditor issues



107


The enforcement depends on the kind of security

Under a right in rem or in personam the creditor is entitled to claim the separation of the respectiveobject from the insolvency estate

Creditors holding contractual pledges a pledge acquired by attachment a resembling security or a legallien in an asset forming part of the insolvency estate are entitled to separate satisfaction The asset willbe liquidated by the insolvency administrator and the creditor will be satisfied according to his securityHowever the creditor has to bear the costs of the liquidation of the asset what will sum up to 9 of theprofit gained by liquidation of the respective asset




Principally inter-company debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholder loans are subordinated by law In addition any repayments ofshareholder loans within one year before filing for insolvency can be challenged by the insolvencyadministrator and therefore have to be paid back by the shareholders It is important to know that theseprovisions do not only apply to ldquorealrdquo shareholder loans but also to any claims of shareholders whichcould be qualified as loans from an economic perspective For example deferred claims for paymentresulting from supply of products could also be qualified as loan with the abovementionedconsequences


Missing any contractual agreements creditors cannot take recourse in respect of any companiesaffiliated with the debtor However creditors can take recourse from any personal liable shareholder ofthe debtor


A creditor committee will be established in larger cases The creditor committee might for exampleelect a different insolvency administrator The creditor committee may decide upon the debtorrsquos right ofself-management and in self-management proceedings the creditor committee has to approve criticaltransactions



In regular insolvency proceedings the company is being controlled by the insolvency administrator

In self-management proceedings the company is being controlled by the debtor being under thesupervision of the creditorsrsquo committee and the custodian

108


The company is financed by the insolvency estate and by receivables collected by the insolvencyadministrator The insolvency administrator might in addition continue transactions to earn money for thecompany or ask individual creditors for granting preferred loans


There is principally no possibility to arrange DIP funding However receivables deriving fromtransactions entered into by the insolvency administrator or the self-managing debtor rank among otherdebts and have to be fully satisfied As a new creditor could expect full satisfaction of his receivableshe could be ready to fund the bankrupt company Nevertheless this procedure is not similar to DIPfunding


The employment contract remains in effect however with special termination conditions ie noticeperiods of 3 months With regard to the wages payable for the last three months before thecommencement of the insolvency proceeding the Employment Agency is obliged to pay any outstandingwages As far as the time period after commencement of the insolvency proceedings is concerned theemployeesrsquo wages have to be paid out of the insolvency estate



If the contract has not or has not completely been performed by the debtor and its other party at the datewhen the insolvency proceedings were commenced the insolvency administrator may at his discretionrequest performance or termination If the insolvency administrator requests performance the other partyis entitled to consideration without limitations



The insolvency creditors must file their claims in writing with the insolvency administrator Such filingshall be accompanied by copies of the documents evidencing the claim Usually the insolvencyadministrators provide standard forms for the filing


In the order commencing the insolvency proceedings the creditors will be required to file their claimswith the insolvency administrator within a definite period of time However claims filed after expiry ofthe filing period will not be excluded from the proceedings The creditor will only have to bear the extracosts if any arising from the late filing


Principally all claims rank equal Some claims will be satisfied ranking below the other claims of

109

insolvency creditors such as interests and penalties for late payment accruing the costs incurred byindividual insolvency creditors due to their participation in the proceedings fines regulatory finescoercive fines and administrative fines claims to the debtors gratuitous performance of considerationas well as claims for repayment of shareholdersrsquo loans

Insolvency creditors will only be satisfied after satisfaction of creditors entitled to claim the separationof an asset from the insolvency estate after the satisfaction of creditors holding a contractual pledge apledge acquired by attachment or a legal lien in an asset forming part of the insolvency estate and afterthe remuneration of debts created by activities of the insolvency administrator


No



Resembling procedures exist in relation to insolvency plans Even if the necessary majorities have notbeen achieved a voting group under certain circumstances shall be deemed to have consented to aninsolvency plan for example if the group of creditors suffer no loss by the insolvency plan comparedwith their situation without such plan



Particularly in order to maintain the enterprise an arrangement in an insolvency plan may be reachedAfter acceptance of the insolvency plan by the creditors the plan will be confirmed by the insolvencycourt As soon as confirmation of the insolvency plan has become binding the insolvency court willdecide on termination of the insolvency proceedings




Creditors to the insolvency estate are creditors who have made transactions with the insolvencyadministrator after the commencement of the insolvency proceedings These claims have to be paid inwhole by the insolvency administrator unless he has indicated lack of mass in an official way before


110


The debtor and its shareholders can take any legal and corporate action they deem sufficient torestructure the company However the debtor is always obliged to file for insolvency if a trigger forinsolvency occurs


Simplified procedures do exist but are not available for companies



The regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings and the GermanInsolvency Act



The commencement of foreign Non-EU insolvency proceedings will be recognized unless the courts ofthe state of the commencement of proceedings do not have jurisdiction in accordance with German lawor where recognition leads to the result which is manifestly incompatible with major principles ofGerman law in particular where it is incompatible with basic rights

111

Greece

George Chatzigiannakis Partner NOMOS Law Firm

wwwnomosgr email gcnomosgr tel +30 2310 239 104



The main types of security taken on immoveable property include the mortgage and the prenotation ofmortgage On the other hand moveable property can be secured through the pledge the chattel mortgageand the floating charge


According to the Greek Civil Code any transaction that is detrimental to the creditorsrsquo interest may beannulled if the debtor and his counterparty are acting in bad faith

According to the Greek Bankruptcy Code (ldquoGRBCrdquo) transactions which took place within the ldquosuspectperiodrdquo ie the period between the cessation of payments and the declaration of bankruptcy and couldbe detrimental to the creditors of an insolvent debtor may be annulled by the insolvency administratorFurthermore fraudulent acts committed by the debtor the last 5 years prior to the bankruptcy beingdeclared can also be annulled if the counterparty was aware of the debtorrsquos bad faith


The directors of a company are personally liable for the payment of corporate taxes and social securitycontributions By virtue of the GRBC after the cessation of payments the debtor must file for bankruptcyproceedings within a period of 15 days Failure to comply with the prescribed deadline could result tothe directors being held personally liable for damages which have been caused to the creditors due tothe fact that the debtor was trading whilst being insolvent

2 Taking action


The main formal procedures are the followinga) Voluntary BankruptcyThe insolvent debtor must file abankruptcy petition within a period of 15 days from the cessation of payments The debtor can initiatethe bankruptcy proceedings voluntarily even when the above mentioned cessation of payments isimminent Once the debtor is declared bankrupt a bankruptcy administrator is being appointed and hismain task is to undertake the management of the debtorrsquos assets and creditor-related matters GRBC alsomakes provision for the institution of Involuntary Bankruptcy according to which a creditor may applyto the competent court requesting for his debtor to be declared bankruptb) Rehabilitation ProcessTheinsolvent debtor being in a state of cessation of payments or in a situation where the cessation ofpayment is imminent may file before the Bankruptcy Court an application for entering the rehabilitationprocess The hearing usually takes place within a period of 2 months from the filing date and the

112

Bankruptcy Court may initiate the rehabilitation process if it is convinced that there are realisticprospects for the insolvent companyrsquos financial viability and that the creditorsrsquo interests are not affectedin a negative manner by the said process Within a period of 2 months the rehabilitation procedure mustbe either successfully (ratification of an agreement between the insolvent debtor and its creditorsrepresenting 60 of the total claims 40 of which should be secured) or unsuccessfully (rejection ofthe application or expiration of the prescribed period within the course of which the agreement shall beconcluded) terminated Upon filing of the application a moratorium on all enforcement actions may bedecided by the Court preventing the transfer of the debtorrsquos immovable and movable propertyc) Re-organization plan (post-bankruptcy)

A debtor can propose a re-organization plan simultaneously with his bankruptcy petition or within aperiod of 4 months (plus 3 months extension) after having been declared bankrupt The bankruptcyadministrator is also entitled to submit such a plan after the lapse of the above mentioned 4-monthperiod


NA


It depends on the particular case however the bankruptcy proceedings are more creditor-friendlywhereas the rehabilitation and re-organization proceedings are more debtor-friendly since the debtorsare protected from enforcement actions whilst they retain as a matter of fact control over the companyand its assets


The insolvency procedures shall commence when the debtor is in a general and permanent way unableto pay its due and payable debts Bankruptcy may be declared on the basis of mere threatened failureto perform when requested by the debtor himself


The application must be filed with the Multi-Member First Instance Court of the district where thecompanyrsquos registered seat is located and which has exclusive jurisdiction over insolvency proceedings


As mentioned above a company can be placed into insolvency proceedings either voluntarily orinvoluntarily as any creditor can file a petition requesting his debtor to be declared bankrupt(involuntary liquidation) In certain situations insolvency proceedings can also be initiated by thepublic prosecutor on grounds of public interest


Generally the competent court will be in charge of supervising the bankruptcy proceedings throughoutand will have exclusive jurisdiction thereto In addition to the general powers of supervision that thecourt is entitled to exercise it will also decide on the petition for the bankruptcy declaration theinitiation of the rehabilitation process or the re-organization plan as well as on the awarding of interimmeasures to the debtors


113

In principle the insolvency process will be concluded when 15 years after the formal declaration ofbankruptcy have lapsed or in case that the debtorrsquos assets do not suffice for the satisfaction of thecreditorsrsquo claims Alternatively the length of the proceedings may also depend on the duration of the re-organization proceedings or that of the liquidation proceedings (ie upon liquidation of all debtorrsquosassets)


All notices to creditors are published in the Bulletin of Judicial Publications of the Juristsrsquo PensionFund


Following the debtorrsquos bankruptcy declaration unsecured and general preferential creditors areprevented from enforcing their rights and remedies against the former


During the bankruptcy proceedings and given that it is in the creditorsrsquo interest and benefit the court canin rare circumstances and upon the debtorrsquos petition and creditorsrsquo committee consent permit the debtorto maintain possession of his assets alongside the liquidator

Are there any local law red-flags particularly relevant to a situation (issues requiring special attention-warnings etc)

The Ministry of Finance issued a Circular addressed to all Greek Tax Authorities which containedcertain guidelines on the application of the lsquoRehabilitation Procedurerdquo (Article 99 et seq of GRBC) Insummary the Tax Authorities are instructed to engage into specific actions (verification of amount owedto the State certification of such debts etc) when either a legal entity or an individual files for theinitiation of the Rehabilitation Procedure or upon ratification of the Rehabilitation Agreement The aimis to ensure that the claims of the Greek State against such debtors are fully ensured


Given the increasing economic crisis and recession that Greece is currently facing more and morepressure is being exercised on the government in order to legislate amend and regulate extensively onissues inherent to the GRBC As a result the GRBC in short time has undergone several amendments inthe areas of bankruptcy proceedings the rehabilitation process and the re-organization plan and itappears that it remains subject to constant change and review by the legislator

3 Creditor issues


After the declaration of bankruptcy all unsecured creditors are barred from enforcing their claims


Pursuant to the GRBC the creditors who secure their claims by way of a special privilege or a securityin rem (secured creditors) can satisfy their claims exclusively through the liquidation proceedingsconducted and are not prevented by the fact that the enforcement of claims has been barred Certainexceptions apply and indicatively we mention the creditorsrsquo assembly decision not to proceed with thesale of the insolvent debtorrsquos company as a whole In case that none of the statutory exceptions provided

114

by law apply the secured creditors may turn against the bankruptcy administrator by filing an in remclaim or they can either commence or continue the suspended execution proceedings and forced sale ofthe debtorrsquos assets

Will setndashoff apply and if so do any issues arise from this

GRBC provides for the right to set off creditorsrsquo claims against the debtorsrsquo claims A necessaryprecondition for exercising this right is that the creditorsrsquo claims have become due and payable prior tothe debtorrsquos bankruptcy However the creditors can be deprived of the right to set-off temporarily by arelevant court order

Are there any prevailing inter-company debt issues

NA


There is no explicit provision under Greek law regulating the insolvency proceedings involvingcorporate groups or a procedural framework within which the assets and liabilities of a grouprsquoscompanies to be pooled for distribution purposes In legal terms each company-member is consideredto be distinct and independent from the corporate group to which it officially belongs


Upon commencement of the bankruptcy proceedings the creditors are called by the liquidator toannounce their claims and participate in creditorsrsquo meetings The creditorsrsquo meeting in turn mayestablish a creditorsrsquo committee composed of 3 ordinary and 3 substitute members The creditorsrsquocommittee duties generally include the duty of supervising the bankruptcy proceedings and assisting theinsolvency administrator in managing the insolvent debtorrsquos matters



Following the declaration of a debtor as bankrupt an insolvency administrator is appointed undertakingthe duty of managing the debtorrsquos estate and relevant matters (creditorsrsquo claims liquidation of assetsetc)


There are no provisions prohibiting the receiving of funding during the period of the insolvencyproceedings Nevertheless the funding that the debtor has received pursuant to a re-organization plan orrehabilitation process will have the highest ranking priority amongst the creditorsrsquo claims


See above

How will the proceedings affect employees and what rights do they benefit from

The declaration of a debtorrsquos bankruptcy does not automatically result to the termination of the existingemployment contracts The termination of the employment contracts is amongst the insolvency

115

administratorrsquos duties to be performedGreek law treats employment claims as preferential Hence afterbankruptcy expenses have been paid unpaid employee remuneration claims incurred within two yearsprior to the bankruptcy having been declared are satisfied


According to the GRBC regarding the treatment of pending contracts the ldquono terminationrdquo principle isexpressly provided as well as the right of option of the administrator to ldquosubrogaterdquo the mass ofcreditors to the position of the debtor It is important to note that there are certain types of contractswhich due to their duration form a special category and are being treated as such ie leases contractsof services or contracts for public utilities which continue to be in force without it being necessary forthe administrator to exercise this option However all contracts are terminated if they are of a personalcharacter or if the law provides so while contractual clauses about automatic termination or terminationrights are not affected by the declaration of bankruptcy


One of the duties held by the insolvency administrator is to notify and invite all creditors included in therelevant list drafted by the debtor to announce and thereafter validate their claims The claims will thenhave to be verified individually by the insolvency administrator before the Insolvency Court Judge


In announcing and validating their claims creditors are given a time limit of 3 months commencing fromthe date of the public notification of the decision declaring the debtor bankrupt Thereafter creditors thatfailed to make the relevant announcement on time are entitled to file an application before the court forverifying their claim


The following priority applies for claims during the bankruptcy proceedings1 Cost incurred in thebankruptcy proceedings2 Preferential claims (employee remuneration taxes and social securitycontributions)3 Secured claims4 Unsecured claims


NA



Both the rehabilitation and the re-organization procedures have cram-down effect and accordingly arebinding for all dissenting or non-participating creditors


See above


116

See above



The conducting of negotiations may be employed as an informal procedure in cases of restructuringSuch an alternative method though can only be successful under certain circumstances and is also subjectto various statutory limitations


The GRBC provides for an accelerating bankruptcy procedure The procedure however can only beapplied if two cumulative criteria are met Namely that the debtorrsquos assets value does not exceed theamount of euro100000 (One hundred thousand euros) and that no immovable properties are includedtherein



Further to the established national legal framework Greek law also incorporated EU Regulation13462000 Additionally the text of UNCITRAL Model Law on Cross ndashborder Insolvency is to a largeextent reflected in Law N38582010


Greek courts have widely recognized foreign insolvency proceedings

117

India

Mr Siddhartha George Partner Mr Vishnu Jerome Partner Poovayya amp Co Advocates amp Solicitors

wwwpoovayyanethomehtml email siddharthapoovayyanet vishnupclegalnet tel +91 9880355883 +91 98199 72712



A creditor can create a security in a number of ways under Indian law The most common way of takingsecurity is by creating a charge over the assets of a debtor A charge can be lsquofixedrsquo (over certain specificproperty) or lsquofloatingrsquo (over underlying assets that are subject to change) A floating charge does notaffect the ability of the debtor to use the underlying asset ndash only if the debtor fails to repay the loan orsuffers any other specified event of default does the floating charge become lsquocrystallisedrsquo or convertedinto a fixed charge

Alternatively the creditor may require the debtor to hypothecate mortgage pledge or grant a lien (asappropriate) in favour of the creditor over the assets of the debtor

Certain specific charges (including a mortgage) on movable property and immovable property of acompany have to be registered with the relevant Registrar of Companies under Section 125 of the[Indian] Companies Act 1956 as amended (the ldquoCompanies Actrdquo)1 in the prescribed form Thesecompulsorily registrable charges include inter alia a charge on any immovable property


The debtor company must have due capacity by virtue of its constitutional documents to enter into anydebt and security transactions

In addition certain past transactions entered into by a company that is being wound-up can be set asidePursuant to Section 531 of the Companies Act any transfer of property moveable or immovabledelivery of goods payment execution or other act relating to property made taken or done by or againsta company within a period of six (6) months prior to the commencement of its winding up shall bedeemed a fraudulent preference of its creditors and be invalid The essence of lsquofraudulent preferencersquo isthe giving of an improper benefit to a few creditors in preference to others leading to inequalitybetween them So it should be established that the dominant motive in the mind of the Company (actingthrough its directors) was to prefer one creditor in preference to other creditors

Further as per Section 531A of the Companies Act any transfer of property moveable or immovabledelivery of goods made by the company not being a transfer or delivery made in the ordinary course ofbusiness or in favour of a purchaser or encumbrancer in good faith made within one (1) year from thepassing of a resolution for voluntary winding up shall be deemed to be void against the liquidator Thepurpose of Section 531A is to preserve the assets of the company and to enable the company to carry outtransactions that might be for the benefit of those interested in the assets of the company An applicationunder this section for setting aside a transfer can be allowed where it is either proved that there was noconsideration for the transaction or that the consideration was so inadequate as to raise a presumption of

118

want of good faith


Indian law does not in general distinguish between the duties of the directors of a solvent company andthe directors of a company that is ldquoin distressrdquo or is being wound-up

A director under Indian law owes certain fiduciary duties to the company including the duty to act ingood faith and to ensure proper use of such directorrsquos powers These duties are in addition to suchdirectorrsquos duties of administration and compliance as required under the Companies Act The directorsof a company being wound-up will have additional responsibilities including calling shareholders andcreditors meetings and filings returns and statements

[1It may be noted that the Companies Bill 2012 which contains comprehensive amendments to theCompanies Act has been passed by Indiarsquos lower house of Parliament and is now beingconsidered by the upper house of Parliament]

2 Taking action


The shareholders of a debtor company can resolve to have the company voluntarily wound-up bypassing a special resolution under Section 484(1)(b) of the Companies Act The directors of a companypursuant to a ldquomemberrsquos voluntary winding uprdquo are required inter alia to make a declaration that thecompany is able to pay its debts in full (Section 488(5)) If the company cannot make such declarationthe resultant voluntary winding-up is referred to as a ldquocreditorsrsquo voluntary winding-uprdquo

The Companyrsquos creditors would be involved to a large degree in a creditorrsquos voluntary winding upprocess The creditors may decide the appointment of the liquidator and may also decide whether toappoint a committee of inspection whose members would be nominated by the Company (subject to thecreditorsrsquo consent) (Section 503 of the Companies Act)

In principle once the winding up resolution is passed and the creditorsrsquo meeting is held wherein thewinding up is approved the role of the Board of the Company diminishes significantly Practically uponthe appointment of the liquidator the liquidator would essentially undertake the process of winding upthe Company and carrying on the business of the company only to the extent as is beneficial to thewinding-up process and there would be little or no responsibility on the part of the Board or otherofficers of the Company


As set out above the creditors of a company have a bigger role in a creditorsrsquo voluntary winding up


In addition to the voluntary winding up provisions referred to above a company may be wound up bythe tribunal2 under Section 433 of the Companies Act

i if the company has by special resolution resolved that the company be wound up

ii if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting

119

iii if the company does not commence its business within a year from its incorporation or suspends itsbusiness for a whole year

iv if the number of members is reduced in the case of a public company below seven and in the caseof a private company below two

v if the company is unable to pay its debts

vi if the tribunal is of the opinion that it is just and equitable that the company should be wound up

vii if the company has made a default in filing with the Registrar its balance sheet and profit and lossaccount or annual return for any five consecutive financial years or

viii if the company has acted against the interests of the sovereignty and integrity of India the securityof the State friendly relations with foreign States public order decency or morality

A company shall be deemed to be unable to pay its debts (Section 434)-

i If a creditor has made a claim exceeding Rupees One Lakh Only (INR 100000-) and the company hasfailed to satisfy the claim for a period of three (3) weeks

ii If the execution or other process issued in favour of a creditor is returned unsatisfied or

iii if it is proved to the satisfaction of the tribunal that the company is unable to pay its debts

[2 In practice since the national companies law tribunal has not yet been set up the state HighCourts continue to exercise jurisdiction in such matters]


In the event that a petition for compulsorily winding-up a company is made before the tribunal underSection 439 the tribunal may inter alia make an order for winding up the company (Section 443) Thetribunal will notify the Official Liquidator (Section 444) who is required to submit a report to thetribunal within six (6) months setting out particulars of the capital assets and liabilities of the companyThe Official Liquidator has wide powers under Section 457 including inter alia to sell any assets ofthe company being wound up When the affairs of the company are completely wound-up the tribunalmay make an order dissolving the company (Section 481)

In the case of a voluntary winding up the company is required to pass a special resolution and appoint aliquidator The liquidator will then subject to the provisions of the Companies Act proceed to wind-upthe company and realize all of its assets pay its liabilities and distribute any surplus share capital


In addition to the voluntary winding-up procedure set out above certain persons may apply to thetribunal to compulsorily wind-up a company An application to the Court for winding up of a companycan be made

i by the company or

ii by any creditor or creditors including any contingent or prospective creditor or creditors or

iii by any contributory or contributories3 or

120

iv by all or any of the parties specified in clauses (i) (ii) and (iii) whether together or separately or

v by the Registrar of Companies

[3The term ldquocontributoryrdquo means every person liable to contribute to the assets of a company inthe event of its being wound up and includes the holder of any shares which are fully paid up andfor the purposes of all proceedings for determining and all proceedings prior to the finaldetermination of the persons who are to be deemed contributories includes any person alleged tobe a contributory (Section 428 of the Companies Act)]


As set out above the tribunal may upon a winding-up petition being presented before it order acompany to be compulsorily wound-up In addition the tribunal has wide powers to ldquomake any interimorderrdquo (section 443(c)) The tribunal will also oversee the exercise of the liquidatorrsquos powers (Section458 460 and 462)

Even in voluntary winding-up proceedings the tribunal has the power to appoint a liquidator where noliquidator is acting or to remove a liquidator for cause (Section 515) and to settle any questions(Section 518)

The Companies Act does not place any restriction on the powers of the High Court in relation towinding up proceedings In fact the courts have wide powers to commence winding up proceedings egif the court is of the view that it is ldquojust and equitablerdquo to commence the same


Depending on the size of the company the liabilities and the number of creditors it could take aminimum of six (6) months with no maximum time limit to wind up a company


In the case of a voluntary winding up the company shall within fourteen days of passing a resolution forvoluntary winding up provide notice of the same in the Official Gazette and in a newspaper beingcirculated in the same district as the registered office of the company The company is also required tomake statutory form filings in respect of the appointment of the liquidator The liquidator is alsorequired to make filings in respect of the winding-up process including yearly reports


No


No

3 Creditor issues


The right of an unsecured creditor to make a claim on the property would depend on the provisions ofvarious legislations such as the Companies Act the Transfer of Property Act 1882 and the Limitation

121

Act 1963

If the debtor is insolvent an unsecured or secured creditor will be required to obtain a judgment anddecree in its favour for the purposes of enforcing its claim on the property An order for the attachmentof property will be executed in accordance with the provisions of the Order XXI of the Code of CivilProcedure 1908 which inter alia contains provisions relating to notice of garnishment etc

In the event that a debtor company is already in winding-up a creditor (secured or unsecured) will haveto prove its debt against the liquidator


If the debtor company is solvent the procedure for enforcement by a secured or unsecured creditor willrequire the decree of a competent court against the debtor company Secured creditors have theadditional right of receiving preferential payment in the event of winding up of a company (subject tosatisfaction of workmenrsquos dues)


The tribunal may pursuant to Section 469 at any time after making a winding up order make an order onany contributory in the manner directed by the order any money due to the company from suchcontributory or from the estate of the person whom such contributory represents exclusive of any moneypayable by such contributory or the estate by virtue of any call in pursuance of the Companies Act andmay allow such person to set-off any money (including dividend or profit) due to such contributory as amember of the company


No


As set out above in the case of a creditorrsquos voluntary winding up the creditors may appoint theliquidator and also appoint committees of inspection



In the event of winding up of a company a Liquidator shall conduct the proceedings in winding up ofcompany and perform such duties in reference thereto as the tribunal may impose


Once a liquidator is appointed in respect of the company the companyrsquos business is carried on only tothe extent that it is beneficial to the winding-up of the company The Liquidator does however have theright to raise any money required by creating a security over the companyrsquos assets


Not applicable under Indian law

122


The Companies Act protects the rights of the workmen of a company by providing preferential paymentof workmenrsquos dues over all other dues payable by the company


Please see our responses in respect of lsquofraudulent preferencersquo and lsquoavoidance of certain transactionsrsquo setout above



In winding up proceedings instituted by a creditor the creditor will petition the court to commencewinding up proceedings with respect to a company where such company has been given notice of thedebt due to the creditor and the debt has remained unpaid for three (3) weeks from the date of thenotice Please also see our earlier responses in respect of compulsory and voluntary winding-upprocedures


The official liquidator is required to provide fourteen (14) daysrsquo notice to fixed creditors of thecompany to prove their debts or claims and to establish any title they may have to against the assets ofthe company


The priority of charges in winding up proceedings is as follows

1 Dues owed to employees

2 Dues owed to secured creditors

3 Dues owed to the government and

4 Dues owed to unsecured creditors


Indian law requires various notices filings and returns to be filed and issued at specific times duringwinding-up proceedings A creditor should obtain specific advice in respect of what filings are requiredto be made by it



No cram down procedures exist in Indian law

123


Cases pertaining to liquidation or winding up are concluded by an order of the High Court of the state inwhich the registered office of the company is situated Cases pertaining to restructuring of a companyare concluded by the Board for Industrial and Financial Reconstruction (ldquoBIFRrdquo) which approves thescheme of reconstruction


A secured creditor may enforce its security outside the winding up proceedings under the Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002



In India restructuring can only be carried out through formal proceedings ie court proceedings Theprovisions of the Companies Act provide for amalgamation andor restructuring envisage intervention ofthe courts Restructuring of sick companies is carried out by the BIFR


No provisions for acceleration of the winding up process exist in India



India is not a party to any international treaty on bankruptcy or insolvency


Under Section 44A of the Code of Civil Procedure 1908 (ldquoCPCrdquo) a decree of the superior courts ofcertain reciprocating territories is executable as a decree passed by a domestic court in India The CPCcontains a list of reciprocating territories which includes the United Kingdom Singapore Hong Kongamong others

Where a country is not a reciprocating territory a judgment obtained from such a country would requireto be enforced in India A party seeking enforcement of a foreign decree or judgment must institute afresh suit in India on the basis of such decree or judgment

124

Indonesia

Ira Andamara Eddymurthy Partner Soewito Suhardiman Eddymurthy Kardono

wwwssekcom email iraeddymurthyssekcom tel+62 21 5212038



A security interest created by a security agreement such as a pledge mortgage Hak Tanggunganfiduciary security or collateral right to warehouse receipt and is in theory immediately enforceablewithout judicial enforcement proceedings if the borrower fails to pay when due any amount outstandingunder a credit agreement or following a declaration of default No prior demand for payment is legallyrequired although this is a common contractual condition In theory a grantee of security may exerciseall the powers and rights of a security conferred by statute or otherwise and may sell or otherwisedispose of all the title to an interest in the secured objects through a public auction or a private sale orby court order as the grantee of security may in its sole and absolute discretion think fit Such principleis also recognized in Article 55 of Law Number 37 year 2004 regarding Bankruptcy and Suspension ofDebt Repayment (October 18 2004) (ldquoBankruptcy Lawrdquo) In the event of bankruptcy a secured creditormay exercise its security rights as if there is no bankruptcy after 90 days from the date of bankruptcydeclaration

In practice however auction houses often request a court order to implement the auction processdespite the fact that the law and the security agreement do not require such a court order This is alsodone because the buyers of collateral would prefer to have an execution order issued by a court on theassumption that such an order would reduce the success of a later attempt by the debtor to recover itsproperty from the buyer In general enforcement of security in Indonesia is time consuming difficult andcostly especially if it involves judicial enforcement


Article 41 of the Bankruptcy Law provides that any actions conducted by the company prior to thebankruptcy can be annulled by the Commercial Court if the action damaged the interest of creditors

Article 42 provides that transactions entered into within one year prior to the bankruptcy decision canbe unwound if they are proven to be entered into with knowledge that they will damage the interests ofother creditors In respect of transactions between the company and certain affiliated parties suchknowledge will be presumed


Law Number 40 year 2007 regarding Limited Liability Companies (August 17 2007) (ldquoCompany Lawrdquo)regulates Director liability Article 97 paragraph 2 of the Company Law provides that a Director mustmanage the company in good faith and with full responsibility Article 97 paragraph 3 further providesthat members of the Board of Directors are personally responsible and also on a joint and several basisfor company losses if such director negligently carries out his or her duties Pursuant to Article 104 ofthe Company Law such liability extends to bankruptcy

125

2 Taking action


The company or its creditor(s) can file a bankruptcy or PKPU proceeding


The company can enter into private negotiations with its creditors


A PKPU is both creditor-friendly and debtor-friendly For a creditor a PKPU does not expose it to therisk of having to pay the receiverrsquos fee in a bankruptcy which is typically more expensive than anadministratorrsquos fee in a PKPU

For a debtor a PKPU is friendly because the company can influence the composition plan which can bebeneficial to the debtor company


Article 2 of the Bankruptcy Law provides that a company can be declared legally bankrupt if it has twoor more Creditors and has failed to pay at least one debt which is due and payable


The companydebtor or its creditor can file a bankruptcy proceeding to the Commercial Court (Article 6of the Bankruptcy Law) The petition for bankruptcy must be submitted by an advocate unless suchpetition is submitted by the Prosecutorrsquos Office Bank Indonesia Financial Services Authority or theMinister of Finance (Article 7) The process for filing a PKPU proceeding is similar with the processfor filing a bankruptcy proceeding


The company or its creditor(s) can place the company into insolvency proceedings


In a bankruptcy proceeding the court has the power to bankrupt a company to determine any challengedamount of debt and to determine the supervisory judge and the receiver in the event the company isdeclared bankrupt

In a PKPU proceeding the court has the power to decide on a temporary and permanent PKPU todetermine any creditorrsquos challenge of an acknowledged amount of debt to appoint the supervisory judgeand the administrators and to ratify or to reject the composition plan


The Court will decide whether a company is bankrupt or not within 60 days after the bankruptcy petitionis registered If the company is declared bankrupt the bankruptcy terminates when all payments havebeen made to all creditors

126

A PKPU proceeding will take between 45 days to 270 days maximum


In a bankruptcy proceeding

a After the court decides that the company is bankrupt according to Article 15 paragraph 4 the receiverwill announce in the State Gazette and two newspapers the following matters (i) name address andwork of the debtor (ii) name of the supervisory judge (iii) name address and the work of the receiver(iv) name address and the work of the member of the temporary creditors committee if it has beenappointed and (v) domicile and time of the first creditors meeting

b Pursuant to Article 90 paragraph 4 the receiver shall summon all creditors having voting rightsthrough advertisement in at least two daily newspapers

c Pursuant to Article 114 the receiver must announce in two daily newspapers the following matters(i) the due date for submission of claims (ii) the due date for tax verification to determine the amount oftax obligations in accordance with the taxation laws and regulations and (iii) the day date time andplace for creditors meeting for the verification of receivables

d In the event there is a ratification of a composition the receiver or administrator shall announce suchcomposition in the State Gazette and at least two daily newspapers

e The receiver must announce in two daily newspapers invitation to creditors after the decision ofcomposition plan rejection obtains a permanent legal force

f The Receiver must announce in two daily newspapers the day hour and venue for the creditorsmeeting regarding settlement of the bankruptcy assets

g Pursuant to Article 202 paragraph 2 the Receiver must announce in two daily newspapers the end ofa bankruptcy

In a PKPU proceeding the administrator will announce in the State Gazette and two newspapers thetemporary PKPU decision invitation to hearing for extension to a permanent PKPU (date time venue ofthe hearing) the appointed supervisory judge and administrators the summary of the composition planthe end of the PKPU and if any the ratification or rejection of a composition plan


The benefit of a bankruptcy proceeding for a debtor is that it will not be liable to pay any debt after it isdeclared bankrupt except in accordance with the Bankruptcy Law procedures for settlement of thebankruptrsquos assets

The obligations of a company to pay its debts are suspended during a PKPU until a composition plan isaccepted or rejected


Please see our responses below


No

127


Yes political factors can come into play if state owned companies or politically connected businesspeople are involved in the proceedings

3 Creditor issues


The Bankruptcy Law prioritizes payment to secured creditors and preferred creditors which exposesunsecured creditors

Article 138 provides that unsecured creditors may not receive any payment if secured creditors canprove that the companyrsquos assets are insufficient to repay secured debts


Article 55 of the Bankruptcy Law provides that a secured creditor is privileged to exercise its securityrights after 90 days from the courtrsquos declaration of bankruptcy

In a PKPU a secured creditor may not enforce its security during the PKPU proceeding


Yes set-off may apply in certain circumstances


Affiliated companies are treated equally with other creditors


Please see response above regarding the possibility to unwind transactions between the company and itsaffiliates within one year of the date of the bankruptcy


Yes In a bankruptcy a creditor committee may be established on court order It is tasked to advise thereceiver but any such advice does not bind the receiver

The creditor committee is also permitted to check all records documents and letters pertaining to thebankruptcy

In a PKPU the court must establish a creditor committee if there are substantial debts involved or ifrequested to do so by creditors representing at least frac12 of all acknowledged debts The administrator ofa PKPU shall request and consider recommendations from the creditors committee



128

A Receiver may continue the business of the bankrupt company on approval from the temporary creditorcommittee or the supervisory judge

A debtor may also be allowed to continue the business activities of the company which is known as aDebtor in Possession (DIP) (See Section 4 point 3 below)


Typically by obtaining further debt or equity investment by a third party


Under the Bankruptcy Law a company can continue to operate its business with the approval of at leastfrac12 of the unsecured creditors


Employees are protected under Article 39 and Article 252 of the Bankruptcy Law They may resign orbe terminated but are entitled to all amounts due to them prior to such event and also severance andservice pay under the Manpower Law


Pursuant to Articles 36 to 38 of the Bankruptcy Law ongoing commercial arrangements at the time ofdeclaration of bankruptcy may be clarified by the counterparty in each agreement to the receiver orsupervisory judge who shall decide on the continuing effectiveness or termination of the agreement Ifthe agreement is terminated the counterparty may claim compensation and will be treated as aconcurrent (unsecured) creditor

If the agreement regards the transfer of traded goods the agreement becomes ineffective at thedeclaration of bankruptcy and the counterparty may act as unsecured creditor to obtain compensation



The administrator in a PKPU proceeding or the receiver in a bankruptcy case will announce in anational newspaper the deadline for creditors to register or file their claims


The timing is determined by the supervisory judge and receiver in a bankruptcy case and anadministrator in a PKPU case


The claims will rank as follow

1 Secured Creditors

2 Preferred Creditors and

129

3 Unsecured Creditors


No



We understand that cram down shall mean involuntarily imposition by a court of composition plan wherecourt is allowed to reduce the principal amount or change the interest rate or other terms in the loanagreement This is not possible in Indonesia unless approved by the requisite creditor votes


Please see above


Please see above



Yes through private negotiations


No



Indonesian courts do not recognize for enforcement foreign court judgments However the decision onthe Indonesian court can be recognized in other jurisdiction For example in the PT Arpeni PratamaOcean Line bankruptcy case the US Bankruptcy Court entered an order recognizing the insolvencyproceeding in Indonesia and extending comity to the plan to restructure debts of more than USD 489million This is the first time a US Bankruptcy Court has recognized a proceeding under Indonesiarsquosinsolvency law


Indonesia does not recognize foreign court judgments A foreign arbitration award is typicallyenforceable in Indonesia provided that the country in which it is rendered is a party to an enforcementtreaty with Indonesia and the subject matter of the award is commercial in nature

130

Ireland

Inez Cullen Associate Brown Rudnick LLP

wwwbrownrudnickcom email icullenbrownrudnickcom tel 35316641738



Debenture

A debenture is a document which contains a covenant by a company to pay all sums due or to becomedue by the company to the lending institution and which contains a charge (fixed andor floating infavour of the lending institution)

Mortgage

A legal mortgage is a lsquoconditional transferrsquo of a property to a lending institution that may becomeabsolute if the mortgagor falls into arrears and is unable to make the repayments which it covenants tomake

The main elements of a mortgage include the covenant to pay the clause relating to the property andassets of the borrower to be secured the negative pledge restricting the borrower from creating anyother charge over those assets ranking equal to the current charge a statement that the security iscontinuing until full repayment and a description of the events that give rise to default and which justifythe appointment of a Receiver in order to enforce the security

Charge

A charge is the form of security for the repayment of a debt or performance of an obligation consisting ofthe right of the lending institution to receive payment out of some specific fund or out of the proceeds ofthe realisation of specific property

A fixed charge is security over a particular asset Conversely a floating charge constitutes a charge overall assets of the borrower company as acquired from time to time The company remains free to dealwith its assets in the ordinary course of business The charge only becomes a fixed charge uponcrystallisation Crystallisation occurs on the appointment of a receiver or liquidator and the floatingcharge fixes on all assets in the ownership of the company at that time A fixed charge gives the bestposition to a lending institution as regards any consequences of enforcement The main disadvantagewith a floating charge is that preferential creditors such as the revenue commissioners rank in priority tothe floating charge but after the fixed charge

Unless the lending institution lodges a notice of the fixed or floating charge created by a company within21 days of its creation with the Companies Registration Office (ldquoCROrdquo) the charge will be void againstthe liquidator or any creditor of the company

Lien

131

A lien is the right to hold the property of another as security for the performance of an obligation Aparticular lien exists only as security for the particular debt incurred

Pledge

A pledge arises where documents of title for a property are delivered by the pledgor to the pledgee to beheld as security for the payment of a debt or for the discharge of some other obligation The subjectmatter of the pledge will be restored to the pledgor as soon as the debt is discharged Where a definitetime for payment has been fixed the pledgee has an implied power of sale upon default

Guarantees Life Assurance Policies

In addition to the borrower entering into security a lender may also insist upon a guarantee by a thirdparty to be answerable for the default of the borrower

A lender may also request that a life assurance policy be put in place for key personnel to the value ofthe loan being taken out


Fraudulent preference under Section 286 of the Companies Act 1963

(the ldquo1963 Actrdquo)

Section 286 of the 1963 Act allows the court to void any transactions involving company property beingtransferred to creditors made within the 6 months prior to the insolvent winding up The section applieswhere it is shown that the paymenttransaction was made with the intention to prefer that creditor to thedetriment of other creditors This 6 month period is extended to 2 years where the paymentdisposal wasmade in favour of a connected person A connected person includes a director or a shadow director

Fraudulent disposition of property under Section 139 of the Companies Act 1990 (the ldquo1990 Actrdquo)

This section enables a liquidator or creditor on a winding up to seek the return of property where thedisposal of the property had perpetrated a fraud on the company its creditors or its members There isno need to prove any intent to defraud It is the effect of the disposal that is relevant Instead of orderingthe return of the property the court can also order that the person who appears to have benefited fromthe disposal pay a sum in respect of the property back to the company

Invalidation of a Floating Charge under Section 288 of the 1963 Act

Section 288(1) of the 1963 Act provides that a floating charge on the undertaking or property of thecompany created 12 months before the commencement of the winding up shall unless it is proved thatthe company was solvent immediately after the charge was created be invalid The 12 month period isextended to 2 years in the case where the charge is created in favour of a connected person


When a company encounters financial difficulty the directors are under significant legal obligationsincluding personal liability of the companyrsquos debts if the company continues to trade while insolventGenerally speaking a company is insolvent when its liabilities are greater than its assets or when it canno longer pay its debts as they fall due

Liquidatorrsquos obligation to submit a Section 56 Report

132

Section 56 of the Company Law Enforcement Act 2001 requires a liquidator of an insolvent company tosubmit a report to the Office of the Director of Corporate Enforcement (ODCE) on the affairs of thecompany within 6 months of his appointment This report sets out among other things the liquidatorrsquosview as to whether the directors acted honestly and responsibly

The liquidator will be obliged to bring a restriction application under Section 150 of the 1990 Actagainst the directors unless relieved of the obligation of doing so by the ODCE

Restriction Applications under Section 150 of the 1990 Act

Section 150 of the 1990 Act obliges the court to restrict a director of a company that goes in to insolventliquidation unless that director proves that he acted honestly and responsibly in relation to the conduct ofthe affairs of the company and that there is no other reason why it would be just and equitable to restricthim Restricted individuals cannot act as a director or secretary of another company for a period of 5years unless that company has a paid up share capital of euro63487 in the case of private companies oreuro317435 in the case of public companies

It is an offence for a restricted director to subsequently act as a director of a company which does notmeet these minimum capital requirements Such a director may be made personally liable for the debtsof such a company if it goes into insolvent liquidation

A company which meets these capital requirements and seeks to appoint a restricted person to its boardwill itself be subject to the following restrictions

(i) the company cannot avail of the whitewash procedure for the provision of financial assistance forthe purchase of its own shares

(ii) the company cannot avail of the exemptions under the Companies Acts 1963-2012 (the ldquoCompaniesActrdquo) to the prohibition on a company making loans quasi-loans and entering into credit transactions infavour of directors and persons connected with the directors and

(iii) the restrictions that preclude public limited companies from allotting shares for noncashconsideration unless certain conditions are satisfied will apply to a private limited company whichappoints a restricted director to its board

In determining whether to make a restriction order the court considers any incompetence or lack ofprobity on the part of the director and examines the directorrsquos responsibility for the insolvency of thecompany In addition the court reviews the extent to which the director has complied with hisobligations under the Companies Acts It is a defence for a director to show that he acted honestly andresponsibly in relation to the affairs of the company Mere commercial misjudgment will not usually besufficient to merit the restriction order

Disqualification of Directors under Section 160 of the 1990 Act

A disqualification order results in a director being disqualified from being appointed or acting interalia as a director or officer of a company or being in any way either directly or indirectly concerned inthe promotion formation or management of any company A disqualification order is usually for a periodof 5 years however the court does have a discretion to lengthen or shorten this time period

The grounds for disqualification orders fall into 2 categories ndash (a) automatic disqualification and (b)disqualification on application to the court

Automatic disqualification occurs where a person is convicted of an indictable criminal offence on

133

indictment (ie by jury trial) in relation to a company or where a person is convicted on indictment ofan indictable offence in relation to fraud or dishonesty

The grounds for disqualification on application to the court include

(i) fraud in relation to the company its members or its creditors

(ii) former convictions for reckless or fraudulent trading in relation to the company (see further below)

(iii) the court deems the individual to be ldquounfit to be concerned in the management of a companyrdquo

(iv) the individual has been ldquopersistently in default in relation to relevant requirementsrdquo This relates toan individual being convicted of offences or defaults under the Companies Acts Where an individualhas been convicted of an offence or a default order has been made against him 3 or more times within 5years he is deemed to have been in default An example of this could be a failure to file annual returnsand

(v) an individual was a director of a company that was involuntarily struck off the Register ofCompanies for failing to file annual returns The courts have disqualified individuals under this headingwhere the company had substantial liabilities at the time of strike off This is to penalise directors thatsimply abandon insolvent companies as an alternative to liquidation

An application for a disqualification order can be made by a number of parties including inter alia theODCE the Director of Public Prosecutions a liquidator examiner creditor officer of member of thecompany Disqualification orders have been rare to date in Ireland However the ODCE is becomingmore active in bringing applications under Section 160

Sections 202 - 205 of the 1990 Act

These sections deal with the books and records to be maintained by a company Breach thereof canresult in personal liability for the officers of the company where it is insolvent and the court forms theview that the lack of proper books impedes the orderly conduct of the liquidation

Personal Liability for Company Debts

The effect of Section 251 of the 1990 Act is that the powers ordinarily vested in a liquidator to examinecompany officers recover company assets and swell the resources available to creditors of thecompany can be exercised by for example a creditor or the ODCE The significance of this fordirectors is that the legal provisions exist to allow a creditor to make directors personally liable forcompany debts in certain circumstances It would be a more difficult prospect for directors to defendsuch proceedings for imposition of personal liability initiated by a creditor ODCE or the liquidator ifthey neglected their obligations to seek an orderly wind up of the company

Reckless trading under Section 297A(1)(a) of the 1963 Act

Directors may be made personally liable for all or part of the debts of an insolvent company if they havebeen knowingly a party to the carrying on business in a reckless manner A director is deemed to beacting in a reckless manner where he ought to have known that his actions or those of the companywould cause loss to the creditors of the company or where he allows the company to incur further debtwhen he knows it is unlikely the company will be able to pay its debts as they fall due

The section allows personal liability to be imposed on directors for the debts (all or part) of thecompany A liquidator will often consider bringing such an application under this section to swell the

134

assets of an insolvent company for the benefit of creditors the liquidator may work in tandem with agroup of creditors who indemnify his costs

The courts apply a subjective test in dealing with applications under this section and will have regard tothe position and experience of the director It is a defence for a director to show that he acted honestlyand responsibly

Fraudulent trading under Section 297A(1)(b) of the 1963 Act

Directors may be made personally liable for the liabilities of an insolvent company where a director isknowingly a party to the carrying on of a business with an intent to defraud creditors The courts have seta high standard of proof under this section and successful prosecutions are relatively rare A liquidatorwill need to show that the directors were guilty of either real moral blame or an active intent to defraud

Misfeasance under Section 298 of the 1963 Act

This section relates to breaches of fiduciary duty of directors to the company and creditors Where adirector has been guilty of misfeasance or breach of duty or has retained or misapplied companyproperty the court may require a director to return the property with interest or contribute to the assetsof the company

2 Taking action


The main procedures are

Statutory Scheme of Arrangement

The company may apply under section 201 of the 1963 Act as amended and invite the court to order theconvening and holding of meetings of creditors or members and where a majority representing 75 invalue at those meetings approve a scheme to subsequently order that the scheme be binding Thecompromise or arrangement with creditors is usually proposed when the company is in financialdifficulties Such a scheme as approved by the court will be binding on dissenting absent or untraceablemembers or creditors

In order to avail of the provisions of section 201 - 203 of the 1963 Act applicants must meet certainrequirements

(i) the applicant must have locus standi

(ii) the Company must support the application

(iii) schemes must not be contrary to law or ultra vires

(iv) where capital is reduced the normal rules of capital maintenance apply and

(v) where relevant there must be compliance with the rules of the Irish Takeover Panel

Although sections 201 ndash 203 are silent on the point it has been decided that the court cannot approve anarrangement that does not have the approval of the company concerned

135

In order for a scheme of arrangement or compromise to be binding it must first receive the sanction ofthe court Section 201 (3) of the 1963 Act provides ldquoIf a majority in number representing three-fourthsin value of the creditors or class of creditors or members or class of members as the case may bepresent and voting either in person or by proxy at the meeting vote in favour of a resolution agreeing toany compromise or arrangement the compromise or arrangement shall if sanctioned by the court bebinding on all the creditors or the class of creditors or on the members or class of members as the casemay be and also on the company or in the case of a company in the course of being wound up on theliquidator and contributories of the companyrdquo

Section 203 of the 1963 Act as amended provides that the court may either by order sanction in thecompromise or arrangement or subsequent order make provision for all or any of the following matters

(i) the transfer to the transferee company of the whole or any part of the undertaking and of the propertyor liabilities of any transferor company

(ii) the allotting or appropriation by the transferee company of any debentures policies or other likeinterests in that company which under the compromise or arrangement are to be allotted or appropriatedby that company to or for any person

(iii) the continuation by or against the transferee company of any legal proceedings pending by oragainst any transferor company

(iv) the dissolution without winding up of any transferor company

(v) the provision to be made for any persons who within such time and in such manner as the courtdirects dissent from the compromise or arrangement

(vi) such incidental consequential and supplemental matters as are necessary to secure that thereconstruction or amalgamation shall be fully and effectively carried out

Under section 201 (1) the court may on the terms as seem just stay all proceedings or restrain furtherproceedings against the company for such term as the court thinks fit

Examinership

When the section 201 remedy has been considered andor attempted and failed there still remains theoption of examinership

An examinership is the procedure whereby an insolvent company may seek protection from the Courtsagainst its creditors to assist its survival (maximum of 100 days)

On the Examiners appointment (with effect from the date of the petition being presented)

(i) no proceedings for winding up the company can be started and no receiver can be appointed overany part of the companys property or undertakings

(ii) no attachment distress or other execution proceedings can be put in force against the property andno security over the companys property and assets can be enforced (although rights of set-off in relationto bank accounts can be exercised) However this is subject to the Financial Collateral ArrangementsDirective which states that examinership cannot prevent certain specified collateral arrangements beingenforced

(iii) no steps can be taken to enforce security granted by third parties for the companys obligations

136

except where the third party chargor has agreed to take an assignment of a secured creditors rights tovote in the scheme of arrangement and

(iv) no Order pursuant to Section 205 (minority oppression) can be made by the Court

The concept was first introduced in the Companies (Amendment) Act 1990 following the collapse of theGoodman group of companies and has subsequently been modified by the Companies (Amendment) (No2) Act 1999 (together the ldquoActrdquo)

Before the court has the jurisdiction to exercise its discretion to appoint an Examiner it must first appearto the court that

Section 2

(i) the company is unable to pay its debts or is likely to be unable to pay its debts

(ii) no resolution to wind up the company has been passed

(iii) no order for the winding up of the company has been made and

Section 3(6)

No receiver stands appointed to the company for a continuous period of 3 days or more

Section 2(3) of the Act provides that a company shall be unable to pay its debts for the purposes of theAct if

(i) it is unable to pay its debts as they fall due (going concern basis)

(ii) the value of its assets is less than the value of its liabilities taking into account its contingent andprospective liabilities (balance sheet basis)

(iii) a demand pursuant to section 214 of the 1963 Act remains unsatisfied 21 days after service or

(iv) if execution or other process issued on a judgment is returned unsatisfied

Section 2(4) provides that the court may infer an inability likelihood of inability to pay its debts wherethe company has sought significant extensions of time to pay its debts from its creditors

In considering a petition for appointment of an Examiner the court must first form the view

(i) the company is or is likely to be unable to pay its debts

(ii) there is no resolution for the winding-up of the company and

(iii) no order has been made for the winding-up of the company

Following that initial consideration the court will only make an order appointing the Examinerldquowhere it is satisfied that there is a reasonable prospect of the survival of the company and the wholeor any part of its undertaking as a going concernrdquo

The petition must nominate a person to be appointed Examiner

The petition for appointment of an Examiner must be accompanied by

137

(i) a consent signed by the person nominated to be Examiner

(ii) a copy of a compromise or scheme of arrangement in relation to the companyrsquos affairs (if alreadyprepared) and

(iii) report in relation to the company by an independent accountant who can be either the companysauditor or a person who is qualified to be appointed as an auditor of the company

Order 75A Rule 4(4) of the Rules of the Superior Court (ldquoRSCrdquo) provides that a petitioner shall on thesame day as the presentation of the petition make an application to the court for directions Rule 5(1) ofthe RSC provides that the court may make such Order or Orders as it thinks fit and may give suchdirections as it things fit In particular the Rule indicates that the court may give directions as to theparties on whom the petition should be served the mode of service the time for such service the datefor the hearing of the petition (if different to that appointed by the Registrar) and whether the saidpetition should be advertised and directions as to the mode of such advertising

Order 75A Rule 5(2) of the RSC provides that the court may appoint any proposed Examiner as interimExaminer with the same powers and duties in relation to the company until such time as the hearing ofthe hearing of the petition or such other adjourned date In most cases the Petitioner will apply for theappointment of an interim Examiner Generally the reason for this is that the time period within whichthe Examiner must complete his task (70 days ndash can be extended to 100 days) is relatively short and runsfrom the date of the petition

Receivership

Receivership is a method for charge holders to recover monies from companies where a loan under adebenture is in arrears or some other event has happened by which under the terms of the debenture thesecurity becomes enforceable for example the company has gone into liquidation or the security is injeopardy

The Receiver will sell the companyrsquos assets so the lender can recover the money owed to them Theprocess is usually used by lending institutions to secure large loans

Appointing a Receiver has major advantages for lenders as it gives them the opportunity to take controlof the charged assets immediately This eliminates any further exposure or risk should the borrowercontinue to default on the loan

A Receiver may be any person who is neither a body corporate nor an undischarged bankrupt He willusually but not always be an accountant He may be appointed by the court or out of court to act asReceiver of the property of a company The duties of a Receiver are normally set out in the instrumentunder the terms of which he is appointed

Technically speaking it is a method of enforcement but is often regarded as a form of insolvencyprocedure Of note however receiverships are not included in Council Regulation (EU) No 13462000on Insolvency Proceedings

Liquidation

When a company reaches the end of its life or becomes insolvent one of the options open to it is to beformally wound up by a liquidation process The three main liquidation options are (i) membersvoluntary liquidation (ii) creditors voluntary liquidation and (iii) court liquidation

1 Members Voluntary Liquidation

138

This is the procedure used to deal with solvent companies Under this type of liquidation all creditorsare paid in full and the surplus is returned to the shareholders

When a company has completed its purpose or the directors of a company decide to retire a taxefficient way of releasing the surplus which may have accumulated is to place the company into amembers voluntary liquidation

The tax advantage for shareholders is that a capital gain received on their shares will only be taxed at30 whereas if the surplus monies were taken out as salary then these monies may be taxed at a muchhigher marginal tax rate

2 Creditors Voluntary Liquidation

This is the most commonly used procedure for dealing with an insolvent company A creditors voluntarywinding up will arise upon conversion of a membersrsquo voluntary winding up or alternatively pursuant tosection 251(1)(c) of the 1963 Act which provides that the members can in general meeting resolve thatthe company cannot by reason of its liabilities continue its business and that it be wound up voluntarilyThe essential features of a creditorsrsquo voluntary winding up are the absence of a declaration of solvencyand further that the winding up is instigated by the members themselves

3 Court Liquidation

Occurs when a petitioner petitions the High Court to appoint a liquidator It is generally used bycreditors of a company seeking payment of monies due to them A court liquidation may be referred to asan official liquidation or a compulsory liquidation

Section 213 of the 1963 Act provides inter alia that a company may be wound up by the court if

(i) the company has by special resolution resolved that the company be wound up by the court

(ii) the company does not commence its business within a year from its incorporation or suspends itsbusiness for a whole year

(iii) the number of members is reduced in the case of a private company below two or in the case ofany other company below seven

(iv) the company is unable to pay its debts

(v) the court is of opinion that it is just and equitable that the company should be wound up or

(vi) the court is satisfied that the companys affairs are being conducted or the powers of the directorsare being exercised in a manner oppressive to any member or in disregard of his interests as a memberand that despite the existence of an alternative remedy winding up would be justified in the generalcircumstances of the case so however that the court may dismiss a petition to wind up under thisparagraph if it is of opinion that proceedings under section 205 of the 1963 Act would in all thecircumstances be more appropriate


Scheme of Arrangement

One of the following may apply to the High Court to propose a scheme of arrangement

139

(i) the company

(ii) any creditor of the company

(iii) any member of the company and

(iv) in the case of a company being wound up the liquidator

Following such application the High Court will order meetings of the creditors and embers to vote inrespect of the scheme of arrangement

Examinership

(i) the company itself ndash on foot of a resolution of the members of the company The directors should notpresent a petition in the companyrsquos name unless they have been authorised to do so by an ordinaryresolution of the members However the court has allowed petitions brought in a companyrsquos name onfoot of a resolution of the directors However given that the directors are also given locus standi topresent a petition the safer course of action is to only present a petition in a companyrsquos name on foot ofthe membersrsquo resolution

(ii) the directors of the company ndash unanimity is not required but a majority of the board must resolve topresent a petition A petition presented on foot of a directors resolution should be brought in the name ofthe directors or in the name of one of them if she is so authorised by the board resolution

(iii) a creditor or contingent or prospective creditor including an employee of the company Section3(5) of the Companies (Amendment) Act 1990 (as amended) provides that the court shall not hear apetition presented by a contingent or prospective creditor until security for costs as the court considersreasonable has been given and

(iv) members of the company holding not less than 110 of the paid up share capital of the company thatcarries the right to vote at a general meeting of the company

Receivership

(i) a debenture holder on foot of a debenture document

(ii) the High Court under specific statutory powers such as that contained in the Land and ConveyancingLaw Reform Act 2009

(iii) the High Court under its equitable jurisdiction under the Supreme Court of Judicature Act (Ireland)1877 and

(iv) the National Asset Management Agency (NAMA) under the National Asset Management AgencyAct 2009

Members Voluntary Liquidation

The members

For members to voluntarily wind up their company a majority of the directors must make a statutorydeclaration that having made a full enquiry into the affairs of the company they are of the opinion thatthe company will be able to pay its debts in full within a period not exceeding 12 months from thecommencement of the winding up Within 28 days of the making of the declaration of solvency the

140

members must pass a special resolution to wind up and appoint a liquidator

Creditors Voluntary Liquidations

The members

The company directors usually initiate proceedings for liquidation of their company in their company isinsolvent

In a creditors winding up the company is obliged to summon a meeting of the creditors The creditorsmust receive at least ten days notice and their meeting must be held on the same day or the day after themeeting of the members at which the resolution for voluntary winding up is to be proposed

Notice of the meeting must be advertised at least 10 days before the date of the meeting in two dailynewspapers circulating in the district of the registered office of the company The creditors have theright to supervise the conduct of the liquidation The creditors at their meeting may appoint a committeeof inspection for this purpose The members and the creditors must be summoned to all meetings calledby the liquidator

Compulsory Liquidations

The Company

The grounds upon which a company can petition for its own winding up are set out in Section 213(c)-(f)of the 1963 Act Although a company can petition for its own winding up the presentation of such apetition is relatively rare compared with creditor petitions For the members of both solvent andinsolvent companies it is generally construed as preferable to resolve in favour of a members orcreditors voluntary winding up because of cost and publicity issues It is also generally considered thatthe directors of the company are unable to present a petition for the winding up of a company

Creditors

The grounds upon which a creditor can petition for the winding up of a company are those set out inSection 213(c)-(f) of the 1963 Act Section 215 of the 1963 Act provides that a creditor or creditorsincluding contingent or prospective creditors have locus standi to petition the court to have a companywound up However for a creditor to be able to present a petition he must have a present liquidateddebt due and owing to him Section 215(c) of the 1963 Act provides that a court shall not hear a windingup petition presented by a contingent or prospective creditor unless such security for costs have beengiven as the court thinks reasonable and a prima facie case for winding up has been established

Contributories and Members

Contributories and members may petition for the winding up of a company upon the grounds set out inSection 213(a)-(g) of the 1963 Act Although all past and present members are prima facie entitled topresent a petition where a contributory is the holder of fully paid up shares the court will be reluctantto allow the application unless it can be shown that the company is solvent and that a substantial surplusof assets will be available to the members as otherwise the member will have no tangible interest in thewinding up

The Director of Corporate Enforcement

The ODCE can petition for the winding up of a company on the grounds set out in Section 12 of the 1990Act The ODCErsquos locus standi arises where the affairs of the company have been investigated by an

141

inspector and it appears from the report of such inspector that the company should be wound up in thepublic interest

The Registrar of Companies

The Registrar of Companies can petition the court to have a company wound up on the grounds set out inSection 213(h) and (i) of the 1963 Act It is extremely rare for the Registrar to petition to have acompany wound up because of his power to instead strike a company off the companies register


No

3 Creditor issues



On application to the High Court to put in place a scheme of arrangement that Court may stay allproceedings or restrain further proceedings against the company for a certain period During suchperiod the rights of unsecured creditors against the company will be restrained

Examinership

During the period of an examinership the company enjoys a ldquostayrdquo during which creditors may notexercise their rights against the company In addition no proceedings of any nature can be commencedagainst the company without prior leave of the High Court and subject to certain limited exceptions anypending proceedings may be stayed Certain specific procedures must be followed vis-agrave-vis guarantorsand the enforcement of guarantees by creditors

Receivership

The appointment of a receiver to a company does not preclude unsecured creditors from enforcing theirrights in respect of the debt owed to them

Creditorsrsquo Voluntary Liquidation

Proceedings and actions against a company are generally not stayed in a voluntary liquidation andunsecured creditors remain free to exercise their rights in this regard However the liquidator of thecompany in voluntary liquidation may apply to the High Court for an order effecting such a stay

Compulsory (Court Liquidation)

No action or proceedings against a company which is the subject of a compulsory liquidation may beproceeded with or commenced without the permission of the High Court



The court is empowered by statute to stay all proceedings or restrain further proceedings against the

142

company however this will not prevent the appointment of a receiver by a secured creditor during theprocess

Examinership

Once a petition for the appointment of an examiner had been presented the rights of creditors to enforcetheir security are severely restricted no action may be taken to realise the whole or any part of acreditorrsquos security except with the consent of the examiner (although regard should be had to theprovisions of the Financial Collateral Arrangements Directive 200247EC) Furthermore the examinerhas the right to use and dispose of a creditorrsquos security

Receivership

The appointment of a receiver to a company does not prevent other secured creditors from enforcingtheir security

Liquidation

Commencement of a court or voluntary liquidation does not prevent a secured creditor from appointing areceiver


The position in Ireland in relation to set-off on insolvency is similar for both personal and corporateinsolvency It is provided by section 284(1) of the 1963 Act In the winding up of an insolvent companythe same rules shall prevail and be observed relating to the respective rights of secured and unsecuredcreditors and to debts provable and to the valuation of annuities and future and contingent liabilities asare in force for the time being under the law of bankruptcy relating to the estates of persons adjudgedbankrupt and all persons who in any such case would be entitled to prove for and receive dividends outof the assets of the company may come in under the winding up and make such claims against thecompany as they respectively are entitled to by virtue of this sectionrdquo

Where set off applies its effect is to disapply the normal principle of pari passu distribution of assets Acreditor who is owed money by the company can avoid proving for that debt where he owes thecompany money Set off in a winding up is not mandatory

In order for debts to be capable of being set off in a liquidation there must be mutuality of debits andcredits between the creditor and the company Accordingly set off can operate only where theobligations to be set off arise between the same parties and in the same right

A creditor must pay any balance owing to the company after the set off to the liquidator or where thecompany still owes him he will have to prove with the companyrsquos other creditors for the balance Thedebt owed by the company may be set off in full This gives the creditor the advantage of making full useof that debt to offset his liability to the company If he does not exercise the set off he faces the prospectof having to pay his debt to the company in full and whilst perhaps receiving only a percentage of thedebt owed by the company to him Any debt which is capable of being proved in a winding up can bethe subject of a set off in a winding up The relevant date for set off is the date on which a resolution ispassed or a court order made to have the company wound up and there must be mutual debts andcredits in existence at that date

By definition the set off clause is not applicable to a solvent winding up nor is it applicable to acompany insolvent at the commencement of the winding up but which subsequently turns out to besolvent

143

There is no provision made in the provisions dealing with voluntary arrangements for set-off and theaccepted view is that the insolvency provisions do not apply to voluntary arrangements or compromisesfor they are expressed to apply only to the winding up of insolvent companies

Similarly insolvency set-off is not applicable to examinerships for there are no winding upproceedings

In relation to receiverships the rules of set-off on insolvency are not applicable until such times as thecompany goes into liquidation Upon a receivership there is an assignment in equity in favour of thedebentureholders of any debt owing to the company and coming within the scope of the charge The rulesrelating to set off on assignments accordingly determine whether there is a valid set off


Section 140 of the 1990 Act allows a court to make an order requiring one company to contribute to thedebts and liabilities of another insolvent ldquorelatedrdquo company in circumstances where the court considersit just and equitable to make such an order

A company is deemed to be ldquorelatedrdquo to another company

(i) where it is its holding companysubsidiary

(ii) where it or its other group companies own more than 50 of the share capital

(iii) where its own members own more than 50 of the share capital

(iv) where it is entitled to exercise or control the exercise of more than 50 of the voting power at anygeneral meeting of the company

(v) where there is another company to which both companies are related or

(vi) where the businesses of the companies have been carried on in such a way that the separatebusiness of each company is not readily identifiable (This last proviso does not however affect thegeneral principle that group companies are recognised to be separate legal entities even where they areinterrelated and interact on a day to day basis For section 140 to be invoked something beyond normalgroup trading is required)

In determining whether it is just and equitable to impose an order the court must consider

(i) the extent to which the related company took part in the management of the insolvent company

(ii) the conduct of the related company towards the creditors of the insolvent company and

(iii) the effect that such an order would have on the creditors of the related company

It is important to note that an order will not be imposed if the only ground for making such order is themere fact that the two companies are related or that the creditors of the insolvent company relied on thefact that another company is was related to the insolvent company

Furthermore no order can be made unless the court is satisfied that the circumstances that gave rise tothe winding up of the company are attributable to the actions or omissions of the related company Itmust therefore be proved that the related company was the cause of the other being wound up

144

Section 141 of the 1990 Act provides that where two or more related companies are being wound upand if a court is satisfied that it is just and equitable to do so both companies may be wound up togetheras if they were one company (a pooling order)

In deciding whether it is just and equitable to make a pooling order a court will have regard (but notexclusively) to

(i) the extent to which any of the companies took part in the management of any of the other companies

(ii) the conduct of any of the companies towards the creditors of any of the other companies

(iii) the extent to which the circumstances that gave rise to the winding-up of any of the companies areattributable to the actions or omissions of any of the other companies and

(iv) the extent to which the business of the companies have been intermingled

Section 141 provides that it is not just and equitable to make a pooling order if the only reason for doingso is

(i) the fact that one company is related to another or that

(ii) the creditors of the company being wound up have relied on the fact that another company is or hasbeen related to the first company

Section 141(3)(c) expressly states that nothing in section 141 or any order made under it shall affect therights of any secured creditor of any company




The directors continue to control the company throughout the process and any effect on the shareholderswill be dictated by the terms of the scheme if approved

Examinership

Unlike liquidations or receivership the directors remain responsible for the day-to-day management ofthe company The principal task of the Examiner is to ldquoexaminerdquo the companyrsquos affairs and formulate acompromise or scheme of arrangement

In practice the Examiner will work closely with the directors to re-assure creditors employees andstaff

Section 9 of the Companies (Amendment) Act 1990 (as amended) provides that the Examiner may applyto the court and if it is just and equitable to do so may make an Order that some of all of the functions orpowers of the directors be transferred to the Examiner Section 9(2) of the Companies (Amendment) Act1990 (as amended) provides that the Court is to have regard to the following matters in making such anOrder

145

(i) that the affairs of the company are being conducted or are likely to be conducted in a manner whichis calculated or likely to prejudice the interests of the company or of its employees or of its creditors asa whole

(ii) that it is expedient for the purpose of preserving the assets of the company or of safeguarding theinterest of the company or its employees or its creditors as a whole that the carrying on of the businessof the company by or the exercise of the powers of its directors and management should be curtailed orregulated in any particular respect

(iii) that the company or its directors have resolved that such an Order should be sought and

(iv) any other matter in relation to the company the courts thinks relevant

Receivership

When a receiver is appointed all the powers of the company and the directors to deal in the assetsaffected by the receivership are suspended All the powers of the receiver and the debenture holder arecontained in the debenture document which is a contractual document save a number of statutoryprovisions A receiver can only deal with assets which have been charged Where the debenture createsa charge over the entire undertaking and business of the company the debenture holder will appoint areceiver to run the affairs of the company in such a manner that the debt due to the debenture holder willbe paid off (and the powers of the companyrsquos directors will be suspended accordingly) Subject to thishowever the appointment of the receiver will not change the status of the company While the directorscease to control the assets over which the receiver has been appointed their normal powers and dutiescontinue in respect of other assets and liabilities of the company (if any)

Where the receiver has been appointed on foot of a floating charge sections 319 and 320 of the 1963Act read in conjunction with each other require the company to provide a statement of affairs to beprovided within fourteen days of receipt of the notice of the receiverrsquos appointment That statement ofaffairs must include particulars of the companyrsquos assets debts and liabilities among other things Thisstatement is required to be verified on Affidavit by current or former officers promoters or an employeewho is capable of giving the information required

Liquidation

Upon the commencement of a membersrsquo voluntary liquidation the directorrsquos powers cease exceptinsofar as the members allow and in a creditorsrsquo voluntary liquidation they cease insofar as thecommittee of inspection (or the creditors if no such committee has been appointed) allow (sections258(2) and 269(3) of the 1963 Act respectively) No such formal divesting of powers from the directorsoccurs in a compulsory liquidation but the practical effect of the vesting of such extensive powers (aslaid out above) in the liquidator is the deprivation of the directors of any role in the operation of thecompany

Effect of Insolvency on the Employment Relationship

The effect of an employers insolvency on the employment relationship will be determined largely by thetype of insolvency situation that arises

Examinership

Two possibilities vis-agrave-vis employees arise

(i) The employment contracts of the companys workforce continue as normal However the examiners

146

proposals may include making a sale of the business or part thereof which might result in redundancies

(ii) Where an order is made under section 9 of the Companies (Amendment) Act 1990 (as amended) (anorder that the functions or powers vested in or exercisable by the directors be performable orexercisable only by the examiner) such an order in effect could constitute a repudiatory breach of thecontracts of employment of those senior employees whose functions are taken over by the examiner

If the business of the company is sold the European Communities (Protection of Employees on Transferof Undertakings) Regulations 2003 (ldquoTUPErdquo) applies

Receivership

Where a Receiver is appointed out-of-court (eg under a debenture) - As the receiver is normallyappointed under a debenture as an agent of the company in receivership his appointment is not generallyviewed as terminating contracts of employment Rather the pre-existing contracts remain operative solong as the receiver continues to employ the workers This employment is viewed as being continued onbehalf of the company Exceptions to this rule exist however such as where the type of work concernedis incompatible with the appointment of a receiver and manager (eg post of managing director)

Where a Receiver is appointed by the High Court - the traditional common law position is that a court-appointed receiver not being an agent of the company is unable to continue to employ employees in thecompany that is in receivership In practice redundancies are effected on the appointment of thereceiver It is rare for a receiver to be appointed by the High Court

If the business of the company is sold TUPE applies

Liquidation

Appointment of a Provisional Liquidator

The appointment of a provisional liquidator has no effect on the employees unless the provisionalliquidator is given a specific power by the court to dismiss employees

Court-Ordered Liquidation

(i) Employment ceasing at time winding-up order is made The winding-up order constitutes notice ofimmediate dismissal The effect of this is that the employee has been dismissed and becomes entitled toarrears of salary up to the date the order is made and damages for wrongful dismissal (ie breach of theemployment contract) (in addition to hisher statutory rights to notice pay redundancy etc)

(ii) Employment ceasing after winding-up order is made - The common view is that the making of awinding-up order constitutes an anticipatory repudiatory breach of the contract of employment In somecases however the business of the company will continue for a limited period of time and employeesmay be rehired by the liquidator and continue in employment

If the business of the company is sold TUPE does not apply

Voluntary Liquidations

The crucial distinction between a members voluntary liquidation and a creditors voluntary liquidation isthat a members voluntary liquidation is a solvent liquidation and the obligations towards employeescannot be shirked There can be no recourse to the Social Insurance Fund in a members voluntaryliquidation unlike in a creditors voluntary liquidation scenario

147

Ultimately the impact of a voluntary liquidation on the contract of employment depends on whether theemployee continues to work after the resolution to wind up the company is passed The position has notbeen codified or enunciated in case law and so the legal position is unclear ndash the position is dictated bypractice rather than by settled law

In a voluntary winding-up whether a members or creditors winding up the passing of the resolutionconstitutes a repudiatory breach of the contract of employment entitling the employee to treat thecontract as terminated and him or herself as having been wrongfully dismissed The employee therebybecomes entitled to his contractual entitlements and his statutory entitlements (in relation to notice payredundancy payment etc)


How is the procedure financed


Funded through the companyrsquos own revenue

Examinership

Section 29(2) of the Companies (Amendment) Act 1990 (as amended) provides that the Examinerrsquosfees costs and expenses as sanctioned by the Court shall be paid and the Examiner shall be indemnifiedout of the revenue of the business of the company or the proceeds of realisation of the assets

Where a Scheme of Arrangement is approved and implemented the Examinerrsquos fees costs and expenses(as agreed with the investor and or the company) are usually paid out of the investment monies and thecourt has no involvement However where the company does not exit examinership successfully theExaminerrsquos fees costs and expenses must be paid out of the assets of the company in priority to all otherclaims secured and unsecured

Receivership

The receivers costs and expenses are funded from the realisation of the secured assets TheDebentureholder may also make fee arrangements with the receiver

Liquidation

The members in general meeting set the remuneration of a members voluntary liquidator The committeeof inspection or if there is no such committee the creditors fix the remuneration in a creditorsrsquovoluntary liquidation The remuneration of an Official Liquidator is a matter for the court whosediscretion will be guided by what it considers to be fair As regards the priority of voluntary liquidatorsrsquoremuneration Section 281 of the 1963 Act provides that such is payable out of the assets of the companyin priority to all other claims Section 244 of the 1963 Act applies to official liquidations and providesthat where assets are insufficient to meet liabilities the court may make an order as to payment as itthinks fit In this regard guidance is provided by Order 74 Rule 128(1) of RSC



This will be dependent upon the specific terms of the arrangement Contracts may provide that on theoccurrence of such an event will constitute a breach of the contract or trigger a forfeiture provision

148

Examinership

Repudiation of contracts - Section 7 (5A) of the Companies (Amendment) Act 1990 (as amended)provides that an Examiner shall have no power to repudiate a prepetition contract entered into by thecompany to which he is appointed However a negative pledge clause may be ignored during the periodof protection if the provisions of section 7(5B) and (5C) of the Companies (Amendment) Act 1990 (asamended) are complied with ndash that the Examiner notifies the charge holder that he is of the opinion thatto allow the NPC be enforced would prejudice the survival of the company and the whole or any part ofits undertaking as a going concern

Section 20 of the Companies (Amendment) Act 1990 (as amended) permits the company itself with thecourtrsquos approval to repudiate (or affirm) any contract where the Examiner is to formulate proposals fora compromise or Scheme of Arrangement However for the court to give its approval the contract mustrequire an element of performance other than payment on the part of the company and on the part of theother party parties to it

Disclaimer of contracts - An Examiner may apply to the court to obtain the powers exercisable by anOfficial Liquidator and this would include the power to disclaim onerous property

Receivership

Unless the contract between in question provides for termination of contract on the appointment ofreceiver the contract can be specifically enforced by the receiver as agent of the company The converseof that where the receiver does not enable the company to perform part of its contract (for examplepayment of rent to a landlord) that creditor will merely have a claim for damages against the companywhich is an unsecured claim

Liquidation

The commencement of a liquidation may 1) constitute a breach of contract 2) be an event that frustratesthe contract 3) have been specifically contemplated by the contract or 4) may not affect the contract atall The effect of the commencement of the liquidation will depend entirely upon the terms of thecontract in question

A liquidator may view certain assets as constituting more of a liability than a benefit to a company Insuch circumstances a liquidator might decide that the company is better off without them and may makean application to disclaim them pursuant to section 290 of the 1963 Act Sometimes owning propertyentails being subject to obligations Where such obligations are burdened by onerous covenants thelegislature provides that the Liquidator may disclaim such property Such onerous obligations includethe following unprofitable contracts property which is unsaleable or not readily saleable land of anytenure burdened with onerous covenants and shares or stock in companies




Creditors should notify the company applicant of their claims in writing

149

Examinership

Creditors should notify the examiner of their claims in writing

Receivership

The receiverrsquos main duty is to ensure the repayment of the debt of the secured creditor who appointedhim Preferential creditors should nonetheless notify the company and the receiver of their claims inwriting

Liquidation

Voluntary ndash formal proof of debts is not essential in voluntary liquidations however submissions ofclaims in writing may be required by the liquidator

Compulsory ndash the creditors must prove their debts The liquidator of the court may fix the time by whichwritten proof of debts must be lodged



There is no general rule on ranking of claims and the arrangements agreed will set out the terms ofpayment

Examinership

There are no legal rules governing ranking of claims in an examinership or a scheme of arrangementThe scheme of arrangement will set out the terms of payment

Receivership

Creditors who are ranked in law as having the highest priority are paid first Then if they have not beenpaid already the creditor who appointed the receiver is paid If however the asset being sold wasreserved for the loan in question the money need only be given to the creditor who appointed thereceiver

Liquidation

The order of entitlement to payment in liquidation is as follows-

(i) fees costs and charges of any earlier examiner

(ii) fees costs and charges of liquidation

(iii) claims of preferential creditors

(iv) payment of floating charge holder

(v) payment of unsecured creditors

(vi) members and contributories of the company

The fixed charge holder is entitled to payment out of proceeds of his secured assets Preferential

150

creditors are entitled to payment in full before other creditors are paid The preferential creditors in anIrish liquidation are the Revenue Commissioners local authority rates wages and salaries up to acertain amount and certain sums payable to employees in respect of accidents sickness unfairdismissal redundancies



Yes in the following instances

(i) Informal Scheme of Arrangement - creditors agree to accept just a portion of their debt in full andfinal settlement

(ii) Formal Scheme of Arrangement - if 60 of creditors approve a Scheme of Arrangement then itwill be binding on all creditors Such a scheme can be a useful way to cram down smaller creditors

(iii) Examinership A majority in number and value of that class alone voting in favour of the proposalsis sufficient for the court to confirm the proposals subject to the examiner showing that no other classwould be unfairly prejudiced were the proposals adopted Even if every other class of creditor votesagainst the examinerrsquos proposals unless one such class can successfully challenge the proposals onunfair prejudice grounds they are ultimately subject to cram-down The unfair prejudice test is typicallymet by a showing that the class receives treatment that is at least equivalent to what that class wouldhave received in an alternative insolvency process The only alternative open to an out of the moneyunsecured creditor class is liquidation and the unfair prejudice test can therefore usually be met wherethat class receives even a nominal dividend Banks are frequently opposed to examinerships due to theirlack of control over the process (compared with a receivership) and fear over potential

(iv) cramming down of the secured debt

How are the procedures formally concluded


This procedure will come to an end once the scheme comes into effect The scheme takes effect once acopy of the High Courtrsquos sanction is filed with the CRO

Examinership

Once approved the scheme of arrangement becomes binding on the company and all the memberscreditors and interested parties (whether or not they voted in favour of it) The court will set a date uponwhich the scheme of arrangement becomes effective The date must be no more than 21 days from dateof approval Once all debts have been paid by the company as per the scheme of arrangement and anynecessary finance obtained the protection period ends and the company continues to trade as it didbefore the examinership The Examiner must deliver the court order approving the scheme ofarrangement to the CRO

The High Court may direct that the process cease at an earlier date if the examiner fails to formalise ascheme of arrangement the court refuses to confirm the examinerrsquos proposals or the examination iswithdrawn If the examinership is unsuccessful the company is usually placed in Court Liquidation

151

Receivership

The receiver must file abstracts of herhis receipts and payments in the CRO for each six-month periodfrom the date of herhis appointment and any lesser final period up to the date heshe ceases to act

Receivership may be a temporary measure and it may not lead to the dissolution of the company Once areceiver has been discharged the directors resume their normal functions in respect of all of the affairsof the company (provided no liquidator has been appointed in the interim)

The receiver will be discharged once he has realised the assets over which he has been appointed andthe secured creditor (and any preferential creditors if appropriate) has been paid A notice of ceasing toact must then be filed in the CRO

Upon cessation unless the company is already in liquidation a statement by the receiver is requiredunder section 52 of the Company Law Enforcement Act 2001 to assert whether at the date of cessationthe company was solvent This statement is filed with the final receivers abstract This statement isforwarded by the CRO to the ODCE


The liquidator must account of hisher dealings to the CRO This reporting requirement is not required ifthe winding up continues for a period of less than 12 months

The liquidator will call a final general meeting of the shareholders for the purposes of explaining theaccount of the winding up to them The meeting must be called by advertisement in two dailynewspapers circulating in the district where the registered office of the company is situated Theadvertisement must be published at least 28 days before the meeting Within one week of the holding ofthe final general meeting referred to above the liquidator must send to the Registrar of Companies acopy of the winding up accounts and must notify him of the holding of the meeting

A return of the final winding up meeting must be filed in the CRO and accompanied by a full statement ofaccount spanning the duration of the liquidation

After three months from the date of receipt and registration by the Registrar of these documents thecompany will be deemed to have been dissolved

At least three months will be needed from the date of the directorsrsquo resolution to wind up the companyup until the final shareholdersrsquo meeting at which the liquidator presents an account of the winding upprovided that the liquidation proceeds in a straightforward manner The company is not officiallydissolved for a further period of approximately three months

Creditors Voluntary Liquidation

The liquidator must summon meetings of the members and creditors at the end of each year to give anaccount of hisher acts and dealings and the conduct of the winding up Details of the meeting must bedelivered to the CRO

As soon as the affairs of the company are fully wound up the liquidator must make up an account of thewinding up and call a general meeting of the shareholders and the creditors for the purpose of laying theaccount before the meeting and giving any explanation of it which may be necessary The account mustshow how the winding up has been concluded Each such meeting must be called by advertisement intwo daily newspapers circulating in the district where the registered office or principal place ofbusiness of the company is situated and must specify the time place and object of the meeting and must

152

be published at least 28 days before the meeting The statement of account is also registered with theRegistrar of Companies

A return of the final members and creditors meetings is submitted by the liquidator to the CRO at thecompletion of the liquidation and is accompanied by a full statement of account spanning the duration ofthe liquidation Three months after its registration the company will be deemed dissolved

Compulsory Liquidation

The winding up will conclude once the court order dissolving the company the examiners certificate ifany and the final papers have been lodged with the CRO

When the Court makes an order for the dissolution of a company it may order that the company bedissolved from the date of presentation of the order to the CRO

The dissolution can be voided within 2 years under section 310 of the 1963 Act



Informal Scheme of Arrangement

Informal schemes are done outside the ambit of the courts and are particularly suitable for situationswhere there are a handful of large creditors

A recovery plan including being asked to write off a portion of their debt should be presented tocreditors for their agreement It should be made clear that the continued operation of the company willbe dependent upon all major creditors accepting the recovery plan The recovery plan should clearlyshow how creditors will benefit by supporting it This can be illustrated by demonstrating the returnwhich creditors would receive under a liquidation scenario versus the return they would receive fromsupporting the recovery plan

A major disadvantage of attempting to implement an informal scheme of arrangement is that the companydoes not have court protection Accordingly if a large creditor decides not to support the recovery planthen he can take legal action such as a winding up petition or enforcement of a judgment debt Acompany can however make the scheme binding on all the creditors under section 279 of the 1963 Act

Any arrangement entered into between a company about to be or in the course of being wound up andits creditors shall subject to the right of appeal under this section be binding on the company ifsanctioned by a special resolution and on the creditors if acceded to by three-fourths in number andvalue of the creditors


The term ldquopre-packrdquo can have different meanings in different jurisdictions but its essence is that beforean insolvency process occurs ndash whether that be receivership liquidation or examinership ndash thebuyerinvestor has been identified and the commercial and legal terms negotiated to a conclusionthereby enabling the deal to be completed immediately or closely following the appointment of theinsolvency office holder and without interruption to the trading activity of the target company

153

The usage of pre-pack insolvency sales is less developed in Ireland than in other jurisdictions but therehas been an increasing number of asset sales structured through pre-pack receiverships over the lastnumber of years The most recent successful example was the sale of the A-Wear retail chain by itsreceiver Jim Luby of McStay Luby In July 2011 the Superquinn grocery chain was sold to Musgraves byits receivers Kieran Wallace and Eamonn Richardson of KPMG in what was probably the largest everpre-pack transaction in this market

In Ireland there are no rules or guidelines in general usage The critical standard for the appointedinsolvency office holder is to ensure that he obtains the best price possible for the assets at the time ofsale Provided the insolvency office holder complies with this test and adheres to the highestprofessional standards there is no barrier to effecting a pre-pack sale in a manner which will stand upto scrutiny and which will allay the concerns of creditors



Section 250 of the 1963 Act provides that an order made by a court of any country recognised for thepurposes of that section and made for or in the course of winding up a company may be enforced by theHigh Court in the same manner in all respects as if the order had been made by the High Court itself Theonly country in respect of which the necessary ministerial order has been made for the purpose of thissection is Great Britain and Northern Ireland Section 250 of the 1963 Act has recently been amended sothat it does not apply in relation to an order made by a court of a State to which the EU InsolvencyRegulation applies (outlined below)

As far as restructurings are concerned Section 36 of the Companies (Amendment) Act 1990 providessimilarly that any order made by a court of any country recognised for the purpose of that section andmade for or in the course of reorganisation or reconstruction of a company may be enforced by the HighCourt No recognition order has yet been made under this section

Council Regulation (EU) No 13462000 on Insolvency Proceedings (the lsquoRegulationrsquo) establishes aregime for the improved efficiency and effectiveness of the conduct of cross-border insolvencies Thisis achieved by providing for cross border recognition and enforcement of basic orders such as theappointment of liquidators and other insolvency officer holders and of remedies typically invoked ininsolvency proceedings As a Regulation adopted by the EU Council this measure has force of laweffective from 31 May 2002

The Regulation is expressed to apply to ldquoCollective insolvency proceedings which entail the partial ortotal divestment of a debtor and the appointment of a liquidatorrdquo (Article 1)

The annex to the Regulations stipulates for each jurisdiction the category of proceedings which thisincludes In the case of Ireland these are listed as meaning

(i) compulsory winding up

(ii) bankruptcy

(iii) administration in bankruptcy of the estate of persons dying insolvent

(iv) winding up in bankruptcy of partnerships

154

(v) creditorsrsquo voluntary winding up (with confirmation of a court)

(vi) arrangements under the control of the court which involve the vesting of all or part of the propertyof the debtor in the official assignee for realisation and distribution and

(vii) company examinership

Whilst the Regulation provides for lsquocreditorsrsquo voluntary winding up (with confirmation of a court)rsquo theconcept of voluntary liquidation in Ireland generally means by definition that there has been no courtorder The Corporate Insolvency Regulations (SI 2002333) establish a procedure whereby such aliquidator can apply to have his appointment confirmed by a certificate of the Master of the High Courtthereby bringing it within the scope of the Regulation

The term lsquoliquidatorrsquo is defined as lsquoany person or body whose function is to administer or liquidateassets of which the debtor has been divested or to supervise the administration of his affairsrsquo (Article 2)The Annex lists those persons for each Member State In the case of Ireland it means a

(i) liquidator

(ii) official assignee

(iii) trustee in bankruptcy

(iv) provisional liquidator or

(v) examiner

Receivership is excluded from the Regulation Therefore recognition of such appointments can beproblematic in some EU jurisdictions

The Regulation does not apply to insolvency proceedings concerning insurance undertakings creditinstitutions or collective investment undertakings Insurance undertakings are the subject of a separateDirective 200117EC Credit institutions are subject to Directive 200124EU

155

Israel

Amos Hacmun Partner Heskia - Hacmun Law Firm

wwwhh-lawcoil email mainhh-lawcoil tel 97236081122



Pledge Floating Charge Assignments


Yes Key circumstances checked arms-length consideration collision with pledges other senior rights


Potential Personal liability if overlooking insolvency situation

2 Taking action


Freezing of Proceedings (similar to chapter 11) and Liquidation or Creditors Arrangement


NA


None is friendly but probably receivership is the best for a secured creditor


Insolvency Petition


Shareholders creditors directors can petition but only the court can order the proceedings


The court appoints a liquidator who acts as officer of the court and reports to the court regularlyMaterial decisionsaction are brought to the court for approval


156

1 to 20 years


In Freezing of Proceedings the company may benefit from getting some time to restructure withoutdebtors taking enforcement actions In Liquidation ndash the company may terminate certain agreementswhich are regarded as burdening assets


Yes but without the ability to pay at market price


Yes many


If the company collapsing is big enough to have a politicalpublic impact then there may be a bailout orother intervention

3 Creditor issues


They normally lose their money


Petition to appoint a receiver to sell the asset


It applies but only in respect to existing debts typically creates debates around bank guarantees etc


If a company in liquidation made payments to shareholdersrelated companies prior to its collapse thenthese payments will be checked and may be revoked


No


Only upon petition and order by the court but in practice this isnrsquot really happening there arebondholder committees which serve for the cooperation among similar bondholders


157


Freezing of Proceedings mdash A trustee appointed by the court Liquidation ndash Liquidator appointed by thecourt or a special manager appointed by the court


During liquidation it is financed by its income and assets new activities can only be done if thefinancing is secured In practice secured creditors may allocate a certain finance amount to enable thesale of the assets in an optimal manner in Case of Freezing of Proceedings ndash there is normally aoperation plan that needs to be approved and it includes also the sources of financing


This happens de facto


They do not benefit from it unless they are taken over and the business continues as in such case theirsocial rights may be protected to a certain extent In case of liquidation part of the social rights andsalary have a senior ranking and are also covered by the national security


The company may ask to cancel certain agreements which are considered as a burdening asset



During insolvency debt claims are submitted to the liquidator and they need to include an affidavit andsupporting evidence


Within 6 months from start of the liquidation


When making the claim the creditor has to provide information as to whether he is a secured creditoretc and have it based by evidence The liquidator then determines the ranking of the creditors



Yes


By order of the court approving the creditors arrangement

158

7 International InteractionWhat is the approach of the companyrsquos jurisdiction in respect of recognition of foreign proceedings

There is a certain level of cooperation in the recognition of foreign judgment however the court andliquidation are not subject to foreign proceedings and they are not binding unless so ordered by the localcourt of liquidation

159

Italy

Roberto Tirone Partner Cocuzza amp Associati Studio Legale

wwwcocuzzaeassociatiit email rtironecocuzzaeassociatiit tel 3902866096



Under Italian law security instruments can be granted over various categories of debtorrsquos assets andnamely

(i) over moveable assets financial securities bank accounts cash receivables IP rights through thegranting of a pledge

(ii) existing or future receivables through a security assignment

(iii) over real estate assets through a mortgage instrument

(iv) if the creditor is a bank over the whole of the circulating moveable assets through a floating charge(ldquoprivilegio specialerdquo)


RD 2671942 (hereinafter the ldquoItalian Insolvency Lawrdquo) provides for a number of grounds upon whicha transaction (including the granting of security interests) entered into by a company which is in financialdifficulties can be avoided if the company goes then bankrupt However special rules relating torestructuring arrangements provide for various exemptions to the applicability of the general claw-backregime in order to boost the availability of creditors to enter into such restructuring schemes


Directors might be charged with both civil and criminal liabilities arising from the company continuingto trade while in distress However once again special rules aimed to narrow or exclude both civil andcriminal liabilities have been set out with respect to the transactions entered into by financiallydistressed companies in the context of a restructuring procedure

2 Taking action


Pursuant to Article 5 of the Italian Insolvency Law a company becoming unable to pay its obligationsmust be declared bankrupt and a formal insolvency proceedings (ldquofallimentordquo) must be commenced forthe purposes of liquidating the companyrsquos assets and using the proceeds of the liquidation to pay thecompanyrsquos creditors

160

Before the financial distress becomes irreversible a company may take into consideration the openingof a restructuring proceedings and namely of

(i) a composition with creditors procedure pursuant to Article 160 et seq (ldquoconcordato preventivordquo)or

(ii) a formal restructuring agreement ratified by the Court pursuant to Article 182-bis of the ItalianInsolvency Law (ldquoaccordo di ristrutturazione del debitordquo)

The choice between the two available formal restructuring arrangements is made by the company takinginto account various elements such as for instance the number of creditors and the type of creditors (iefinancial institutions versus commercial suppliers) to be involved in the arrangement the level offinancial distress etc


A company can always execute a restructuring agreement without the opening of a formal procedure infront of the Court In such a scenario exemptions to the claw-back regime and limitations to thedirectorsrsquo liabilities can apply provided that the restructuring agreement is entered into by the companyin accordance with Article 673(d) of the Italian Insolvency Law (ie the restructuring agreement isbased on a report issued by a certified accountant who matches certain requirements provided for by theItalian Insolvency Law)


Insolvency proceedings (ldquofallimentordquo)

The insolvency proceedings (ldquofallimentordquo) is solely meant to safeguard the creditorsrsquo rights in asituation where the company ceases to exist as a corporate entity

Composition with creditors procedure (ldquoconcordato preventivordquo) and formal restructuring agreement(ldquoaccordo di ristrutturazione del debitordquo)

In general terms and based on the different degree of involvement of the Court and on the majority ofcreditors necessary for the approval of the restructuring arrangement the composition with creditorsprocedure (ldquoconcordato preventivordquo) can be labelled as a more creditor-friendly restructuringprocedure compared with the formal restructuring agreement (ldquoaccordo di ristrutturazione del debitordquo)which presents more debtor-friendly features

Informal restructuring agreement

Indubitably an informal restructuring agreement which matches the requirements set out by Article673(d) of the Italian insolvency law can present very favourable features from the debtorrsquos standpoint


Pursuant to Article 5 of the Italian Insolvency Law a company becoming unable to pay its obligationsmust be declared bankrupt and a formal insolvency proceedings (ldquofallimentordquo) must be commenced


With respect to both insolvency proceedings (ldquofallimentordquo) and formal restructuring arrangements awritten request must be filed with the Court which has authority over the area where the company has its

161

registered office



The company (acting through its directors) each creditor and the public prosecutor are entitled to file apetition for the commencing of an insolvency proceedings (ldquofallimentordquo)


With respect to the formal restructuring arrangements an application can be filed by the company (actingthrough its directors)



In the context of an insolvency proceedings (ldquofallimentordquo) the Court involvement is massive being thewhole proceedings monitored and directed by the Court in cooperation with the receivership


Also the composition with creditors procedure (ldquoconcordato preventivordquo) provides for an extensiveinvolvement of the Court whilst with respect to the execution of a formal restructuring agreement(ldquoaccordo di ristrutturazione del debitordquo) the role of the Court is basically limited to check whether allthe requirements provided for the approval of the agreement by the Court have been duly fulfilled



The length of an insolvency proceedings (ldquofallimentordquo) can vary to a great extent in reason of the numberof creditors the amount of the debts to be repaid the nature of the companyrsquos assets to be sold by thereceivership in some cases it can take several years for the insolvency proceedings (ldquofallimentordquo) tobe accomplished

Composition with creditors procedure (ldquoconcordato preventivordquo)

With respect to the composition with creditors procedure (ldquoconcordato preventivordquo) a six to ten monthperiod from the date of filing of the request with the Court is usually necessary for the agreement amongthe company and the creditor to be reached and approved by the Court

Formal restructuring agreement (ldquoaccordo di ristrutturazione del debitordquo)

The procedure for the approval by the Court of a formal restructuring agreement (ldquoaccordo diristrutturazione del debitordquo) ndash unless an opposition is filed by a creditor ndash usually takes a one to sixmonth period from the date of filing of the request with the Court



162

The insolvency proceedings (ldquofallimentordquo) formally commences with the Court issuing a decisionstating that the company went bankrupt which has to be served (by a Court officer) to the company and tothe creditors who filed the insolvency petition to the receiver and to the public prosecutor Thedecision is then published on the Companyrsquos Register


The decision approving the composition with creditors is published on the Companies Register


The arrangement is published on the Companies Register



In the context of an insolvency proceedings (ldquofallimentordquo) the company basically ceases to be boundupon by the contracts entered into previously and no creditor can start enforcement proceedings againstthe company


The access to the formal restructuring arrangements restrain the creditors from starting enforcementproceedings for sixty days from the publication of the restructuring agreement (or subject to the Courtgiving its consent from the registration of the proposal of restructuring agreement) with the relevantCompanies Register

A further benefit the company as debtor can enjoy by acceding to a composition with creditorsprocedure (ldquoconcordato preventivordquo) is represented by the chance to request the Court to be entitled toterminate or suspend the execution of contracts binding upon the company (Article 169-bis of the ItalianInsolvency Law)


No


No


In the context of insolvency or restructuring proceedings involving big corporations unions and politicalbodies could try to influence the outcomes of the proceedings in order to avoid the negative impact onthe regionrsquoscountryrsquos economy arising from the company getting bankrupt

3 Creditor issues


163

In the context of an insolvency proceedings (ldquofallimentordquo) unsecured creditors rank below securedcreditors thus their chances to recover their debts is low if not in some cases minimal

With respect to the restructuring arrangements in terms of market practice secured creditors are oftensatisfied in full but depending on factual circumstances they can also asked to write off part of theirdebts


Even if the enforcement of security instruments is banned in the context of an insolvency proceedings(ldquofallimentordquo) secured creditors rank above other creditors with respect to the liquidation of theproceeds of the sale of the assets over which the relevant security interests were granted


Set-off rules apply to the insolvency proceedings (fallimentordquo) with respect to the debts owed by acreditor to the company prior the commencing of the proceedings


No


No


Yes a creditor committee is established in the insolvency proceedings (fallimentordquo) and its role is tomonitor the liquidation process




The receiver controls the company


The board of directors and the shareholders continue to control the company under the supervision of anadministrator appointed by the Court


The board of directors and the shareholders continue to control the company


Claims for the repayments of funds granted in order to allow the implementation of the composition withcreditors procedure (ldquoconcordato preventivordquo) or a formal restructuring agreement (ldquoaccordo diristrutturazionerdquo) rank among the first-tier claims Furthermore the claw-back regime does not apply to

164

financings granted in the context of restructuring arrangements


No


In the context of an insolvency proceedings (ldquofallimentordquo) claims for the repayments of rank among thefirst-tier claims

In general special pieces of legislation provide for social security schemes purported to reduce theeconomic damages for employees of financially distressed companies



Depending on the nature of the contract either the contract automatically ceases to be effective upon thecommencing of the proceedings or the receiver is entitled to decide whether to terminate or to keep inforce the contract entered into by the company


Pursuant to Article 169-bis of the Italian Insolvency Law the company is entitled to require the Court toterminate or suspend the contracts binding upon the company


The proceedings does not affect contracts binding upon the company




Creditors have to file a petition with the Court


The commissioner after having examined the companyrsquos account books convenes a creditors meetingfor them to vote about the proposal of composition Creditors who are not convened are entitled to file apetition challenging the approval of the composition by the Court


Creditors are entitled to file an opposition to the approval by the Court of the restructuring arrangementwithin 30 days from the publication of the latter on the Companiesrsquo Register


165


At least 30 days before the first hearing scheduled by the Court for the examination of the companyrsquosliabilities


At least 30 days before the first hearing scheduled by the Court for the approval of the composition bythe Court


Within 30 days from the publication of the restructuring arrangement on the Companies Register


In the context of an insolvency proceedings (ldquofallimentordquo) claims rank as follows

(i) claims labelled as first tier claims (ldquocrediti prededucibilirdquo) by the applicable laws (as those owedby creditors of the receivership such as lawyers acting in favour of the receiver accountants etc butalso those arising from the financing of restructuring arrangements)

(ii) claims arising from secured or privileged debts (such as those of the employees)

(iii) claims arising from unsecured debts

Please note that a very articulated and quite cumbersome ranking among the claims in the three mainclasses is provided for by the Italian Insolvency Law and by special pieces of legislation


No



No



Insolvency proceedings can conclude in two different ways

(ii) an insolvency composition with creditors (ldquoconcordato fallimentarerdquo) is approved by the Court andfully implemented in such a scenario the company is entitled to run the business again

(ii) following the liquidation of the companyrsquos assets a decision of the Court formally concludes theinsolvency proceedings (ldquofallimentordquo) if as usually happens the companyrsquos net equity is negative thecompany is winded up

166


Following the issuance by the Court of the decision approving the composition or the formalrestructuring agreement the procedure can be deemed successfully completed once the relevantrestructuring plan has been duly fulfilled by the company


In the context of the composition with creditors procedure (ldquoconcordato preventivordquo) and of the formalrestructuring agreement (ldquoaccordo di ristrutturazione del debitordquo) creditor classes can be created



See Paragraph 22 above


No



European insolvency laws apply to Italian companies


European insolvency proceedings are automatically recognized in Italy pursuant to the Europeaninsolvency laws With respect to proceedings in extra-EU jurisdiction the recognition of decisionsissued by foreign courts is usually ruled by international conventions ratified by Italy in the lack of anapplicable international convention ratified by Italy the rules set out by the Italian civil procedure codeand by other special pieces of legislation for to the recognition of foreign decisions apply also for thecase of decisions relating to insolvency proceedings

167

Korea

Jae Hoon Kim Partner Eunjai Lee Partner LEE amp KO

wwwleekocom email jhkleekocom lejleekocom tel 8227724440 8227724240



Under Korean law a creditor may obtain security interest over real property personal property claimsand other rights (for instance stocks and bonds) by agreement with the owner of such assets The mostcommon form of security is mortgage in case of real property and pledge in case of personal propertyclaims and other rights

It is also possible for the owner of assets to transfer the title of such assets to the creditor for securitypurposes


Transactions entered into whilst the company is in financial difficulties may be subject to cancellation oravoidance

(i) Creditorrsquos right of cancellation

Under the Civil Code where (a) a debtor company engages in a legal act (including contracts) thatprejudices its creditors (eg the debtor companyrsquos assets are reduced due to such act) (b) the debtorcompanyrsquos liabilities exceed its assets prior to or as a result of such act and (c) the debtor company andthe beneficiary of such act are aware of the prejudice to the creditors then creditors have a right to seekcancellation of such act and return of benefits

This right can be exercised by the creditors where the debtor company is not in a rehabilitation orbankruptcy procedure and is not available once either of such procedures is commenced

(ii) Right of avoidance

Under the Debtor Rehabilitation and Bankruptcy Act (ldquoActrdquo) the trustee in a bankruptcy procedure orreceiver in a rehabilitation procedure may avoid the following acts

(a) Any act of the debtor company with the knowledge that it would prejudice creditors Prejudiceincludes not only a reduction of assets but also a preferential treatment

(b) Any act of the debtor company taking place after a ldquosuspension of paymentrdquo (which refers to thedebtorrsquos explicit or implicit admission that due to the lack of financial resources it cannot pay itsliabilities continuously as they become due) or an application for commencement of a bankruptcy orrehabilitation procedure (collectively the ldquoTriggering Eventrdquo) that (i) creates a security interest in thedebtor company (ii) discharges any obligation of the debtor company or (iii) is otherwise prejudicial tocreditors

168

(c) Any act of the debtor company taking place after or within 60 days before a Triggering Event that (i)creates a security interest in the debtor company or (ii) discharges any obligation of the debtorcompany where the debtor company is not obligated to give rise to such creation or discharge

(d) Any gratuitous act (for example a grant of a gift) of the debtor company taking place after or withinsix (6) months before a Triggering Event

If the transaction was with a person having a certain special relationship with the debtor company asdefined by the Act (eg its director) then a more relaxed standard for avoidance applies


A director does not become liable merely for continuing to trade whilst the company is in financialdifficulties unless he or she has violated his or her fiduciary duty in relation to a particular transactionDirectorrsquos duties remain the same in financial difficulties as in normal state In case of a violation offiduciary duty the director may be held liable for civil damages andor even be subject to a criminalcharge The director may also be subject to a shareholderrsquos derivative suit

2 Taking action


The Act provides for (1) a rehabilitation procedure the purpose of which is to assist the debtorcompanyrsquos rehabilitation and (2) a bankruptcy procedure the purpose of which is to assist the debtorcompanyrsquos orderly liquidation


Financial institutions as creditors can invoke a work-out programme for a debtor company under theCorporate Restructuring Promotion Act (ldquoCRPArdquo) which provides for work-out programmes for certainfinancially troubled companies The CRPA was originally enacted in 2001 and was effective until 2005The CRPA was re-introduced twice between 2007 and 2013 The CRPA has been re-introduced again asof January 2014 and is effective until 2015 To initiate a work-out programme the debtor companysmain creditor bank notifies the debtor company as a ldquocompany showing signs of potential defaultrdquo Thedebtor company then makes an application to the main creditor bank for commencement of a work-outprogramme Upon receipt of such application the main creditor bank calls for a meeting among financialinstitutions that have extended credit to the debtor company (ldquoCommissionrdquo) When the meeting iscalled the Governor of the Financial Supervisory Service can ask the applicable financial institutionsnot to exercise their rights against the debtor company until the meeting of the Commission is convenedAt such meeting the Commission may decide that the applicable financial institutions should stay anyexercise of their rights against the debtor company for up to four (4) months The Commission thenenters into a restructuring agreement with the debtor company The restructuring agreement provides foramong others how the debtor company will recover from its financial difficulties and how the terms andconditions of credit agreements with the applicable financial institutions will be adjusted If (1) theCommission cannot agree on the stay (2) the restructuring agreement is not finalized during the stay (3)the debtor company does not implement the restructuring agreement or (4) the debtor company wishes tostop the work-out programme then the work-out programme would be discontinued All Commissiondecisions must be made on the basis of affirmative votes of the applicable financial institutionsrepresenting at least 75 of the aggregate amount of the credit extended to the debtor company and anydecision on the adjustment of the terms and conditions of credit agreements additionally requiresaffirmative votes of at least 75 of all secured claims

169

For companies that are not covered by the CRPA financial institutions may prepare various work-outagreements that are similar to those under the CRPA

Which procedures are creditor-friendlydebtor friendly

In general a rehabilitation procedure tends to be more debtor-friendly in that it allows the debtorcompany to continue its business while retaining flexibility in terms of managing and adjusting its debtobligations towards the creditors via a rehabilitation plan A bankruptcy procedure does not favour anyparticular group as its purpose is merely to liquidate and distribute the residual assets of the debtorcompany in an orderly manner A work-out programme tends to be more creditor-friendly in that itallows the creditors to take practical control of the process in a manner that addresses their needs orinterests


An application for commencement of a rehabilitation procedure under the Act may be filed by the debtorcompany if (1) it is unable to pay its debts as they become due without causing a significant impedimentto the continuation of its business or (2) there is a danger that the debtor company will becomeinsolvent Certain parties other than the debtor company may file an application for commencement of arehabilitation procedure if there is a danger that the debtor company will become insolvent

An application for commencement of a bankruptcy procedure can be filed if a debtor company isinsolvent The test for insolvency under the Act is the inability to pay liabilities when due If there is aldquosuspension of paymentrdquo (which refers to the debtors explicit or implicit admission that due to the lackof financial resources it cannot pay its liabilities continuously as they become due) the debtor companyis presumed to be unable to make payments as they become due An example is a clearing housessuspension of transactions with the debtor company (ie the debtor company issues a note and the partyto whom the note is issued presents it to the clearing house for settlement but the debtor company failsto make payment under the note) If the debtor company is a legal entity (excluding companies that are ofpartnership-like types) another basis for insolvency is excess of liabilities over assets


The process for filing for a rehabilitation procedure involves preparation and submission of anapplication for commencement of a rehabilitation procedure together with certain prescribedinformation and documents The applicant should pay for the costs of a rehabilitation procedure inadvance If the applicant is a party other than the debtor company the costs paid by the applicant will bereimbursed by the debtor company as common interest claim Upon filing the court will review theapplication and make certain investigations including interview with the representative of the debtorcompany and decide whether or not to commence a rehabilitation procedure

The process for filing for a bankruptcy procedure involves preparation and submission of an applicationfor commencement of a bankruptcy procedure together with certain prescribed information anddocuments The applicant should pay for the costs of a bankruptcy procedure in advance If the applicantis a party other than the debtor company the costs paid by the applicant will be reimbursed by thedebtor company as estate claim Upon filing the court will review the application and make certaininvestigations including interview with the representative of the debtor company and decide whether ornot to commence a bankruptcy procedure


An application for commencement of a rehabilitation procedure may be filed by the debtor company Ifthe debtor company is a corporation or limited liability company the application may be filed by (i)

170

creditors with claims equivalent to 10 or more of the total amount of issued equity interests of thedebtor company at par value or (ii) equity holders with 10 or more of the total amount of issued equityinterests of the debtor company at par value If the debtor company is not a corporation or limitedliability company the application may instead be filed by (i) creditors with claims equivalent to FiftyMillion Korean Won (KRW 50000000) or more or (ii) equity holders with 10 or more of the totalamount of issued equity interests of the debtor company at par value

An application for commencement of a bankruptcy procedure may be filed by the debtor company itsdirector member with unlimited liability or liquidator or a creditor


Both rehabilitation procedure and bankruptcy procedure accompany close supervision and control of thecourt The commencement and conclusion of both procedures as well as all material decisionspertaining to each step of the procedures are subject to the courtrsquos approval


The court will decide within one (1) month whether or not to commence a rehabilitation procedureAfter commencement claims are filed and a rehabilitation plan is usually submitted by the receiver Therehabilitation plan will be reviewed at the second meeting of the interested parties consisting ofcreditors and shareholdersequity holders and will be put to vote at the third meeting of the interestedparties The Act provides that the required consents from the interested parties with respect to arehabilitation plan should be obtained within one (1) year (which is extendable for a further term of six(6) months) from the commencement of the rehabilitation procedure In ordinary cases it usually takesabout eight (8) to twelve (12) months before the court approves a rehabilitation plan

For a bankruptcy procedure it is difficult to generalize how long the procedure as a whole will takeGenerally a bankruptcy procedure will commences within (a) one (1) month if the filing party is eitherthe debtor company or a creditor but no objection is raised by the debtor company or (b) three (3)months if the filing party is a creditor and the debtor company raises an objection

What other steps such as notice are require

The Act has no provision for automatic stay Thus it is necessary to protect the debtor company duringthe interim period between the filing and the court decision for commencement of a rehabilitation orbankruptcy procedure In this regard the Act provides that when an application for commencement of arehabilitation procedure is filed the court may issue certain temporary orders including acomprehensive preservation order imposing general restrictions on creditors ability to enforce theirclaims against the debtor company

Likewise the Act provides that when an application for commencement of a bankruptcy procedure isfiled the court may issue certain temporary orders With respect to a bankruptcy procedure howeversuch orders are rarely issued in practice Further unlike in a rehabilitation procedure no comprehensivepreservation order is available


Once a rehabilitation procedure is commenced creditorsrsquo claims are stayed except for common interestclaims and certain claims approved by the court and will be adjusted by and repaid under therehabilitation plan

Once a bankruptcy procedure is commenced creditorsrsquo claims are stayed except for secured claims and

171

estate claims and will receive distributions


An arrangement similar to a debtor in possession is only available in case of a rehabilitation procedureIn a rehabilitation procedure the existing representative of the debtor company (usually therepresentative director) will serve as the receiver absent special circumstances namely (1) where therepresentative has engaged in acts that caused financial difficulties (2) where the creditor committeerequests for appointment of a different person with reasonable basis or (3) where appointment of adifferent person is otherwise necessary for rehabilitation


There are no local law red-flags generally applicable to a situation However there are some industry-specific laws For example the Banking Act and other laws are applied with respect to insolvency ofbanks


Generally no political factors come into play during a rehabilitation or bankruptcy procedure under theAct

3 Creditor issues


In a rehabilitation procedure unsecured creditorsrsquo claims are stayed unless they are qualified ascommon interest claims or have obtained court approval and will be adjusted by and repaid under therehabilitation plan

In a bankruptcy procedure unsecured creditorsrsquo claims are stayed unless they are qualified as estateclaims and will receive distributions


In a rehabilitation procedure as in the case of unsecured creditorsrsquo claims secured creditorsrsquo claims arestayed unless they are qualified as common interest claims or have obtained court approval and will beadjusted by and repaid under the rehabilitation plan

In a bankruptcy procedure a secured creditor may freely enforce its security


In general creditors may set off their claims against their obligations towards the debtor companywithout court approval in both rehabilitation and bankruptcy procedures provided that set-off in arehabilitation procedure is permitted only within a designated period for filing of claims while there isno such time limitation in a bankruptcy procedure and provided further that set-off is not available (1)where the creditorrsquos obligation is accrued after commencement of a rehabilitation or bankruptcyprocedure or (2) where the creditorrsquos obligation is accrued with knowledge that a Triggering Event hasoccurred except where the obligation is founded on a cause (a) that is provided by law (b) thatoccurred before the creditor became aware of the Triggering Event or (c) that occurred one (1) year orlonger before the commencement of a rehabilitation or bankruptcy procedure (3) where the creditorrsquos

172

claim against the debtor company is acquired from a third party after the commencement of arehabilitation or bankruptcy procedure or (4) where the creditorrsquos claim against the debtor company isacquired from a third party with knowledge that a Triggering Event has occurred except where theclaim is founded on a cause (a) that is provided by law (b) that occurred before the creditor becameaware of the Triggering Event or (c) that occurred one (1) year or longer before the commencement of arehabilitation or bankruptcy procedure


In a rehabilitation procedure the Act provides that certain claims arising out transactions between thedebtor company and a person having a certain special relationship with the debtor company as definedby the Act including its affiliates may be treated less favourably in the rehabilitation plan There is nocomparable provision with respect to a bankruptcy procedure under the Act


No such recourse is available


A creditor committee will be established when an application for commencement of a rehabilitation orbankruptcy procedure is filed If the debtor is a natural person or small-to-medium company it may notbe established The creditor committeersquos main role is to express opinions on material matters (egappointment or removal of the receiver or trustee) during the applicable procedure



In a rehabilitation procedure a receiver who is the existing representative of the debtor company orsuch other person appointed by the court controls and decides on the debtor companys business affairssubject to the courts approval for all material decisions

In case of a bankruptcy procedure a trustee appointed by the court has control over the bankruptcyestate subject to the courts approval for all material decisions

How is the company financed 4-3 Is it possible to arrange DIP funding (or similar)

In a rehabilitation procedure a receiver can borrow monies with the courts approval The lendersclaim for repayment of the borrowed monies is a common interest claim having priority over any othercommon interest claims except for secured common interest claims

In case of a bankruptcy procedure a trustee can borrow monies with the courts approval Howeversuch a financing rarely takes place in a bankruptcy procedure A claim for repayment of monies soborrowed is an estate claim However unlike in a rehabilitation procedure no super-priority is grantedto such an estate claim


In case of a rehabilitation procedure the collective agreement with employees is not an executorycontract and the debtor company may not terminate an employee on grounds of commencement of arehabilitation procedure Further any wages severance allowance and certain other monetary

173

obligations of the debtor company towards employees are classified as common interest claims

In case of a bankruptcy procedure on the other hand the trustee terminates all employees immediatelyupon commencement of a bankruptcy procedure The trustee may separately hire the necessary personnelto assist him or her usually from among the terminated employees As in the case for rehabilitation anywage severance allowance and certain other monetary obligations of the debtor company towardsemployees are classified as estate claims


In case of a rehabilitation procedure if there is any contract entered into by the debtor company but notperformed before commencement of the procedure and the unperformed obligations of the debtorcompany and its counterparty are in a relationship of mutual consideration then the receiver has anoption to terminate the contract The counterparty to the contract may send a notice to the receiverdemanding a decision of whether to perform or terminate the contract and the receiver is deemed tohave elected to perform if such decision is not notified to the counterparty within thirty (30) daysfollowing receipt of the counterpartyrsquos notice If the receiver elects to perform then the debtorcompanyrsquos obligations under the contract become common interest claims If termination is elected theclaim for damages arising out of the termination becomes a rehabilitation claim The Act provides forcertain modifications and exceptions to this rule with respect to certain types of contracts (eg financialcontracts lease contracts utility supply contracts)

In case of a bankruptcy procedure the trustee has a similar option as the receiver in a rehabilitationprocedure One of the differences is the effect of the trusteersquos failure to notify its decision to thecounterparty Unlike in a rehabilitation procedure a failure to respond in a bankruptcy procedure isdeemed to be an election to terminate



In a rehabilitation procedure the receiver should prepare and submit to the court a list of claims againstthe debtor company Creditors will need to file their claims with the court if their claims are not listedA prescribed form is used for claim filing Creditorsrsquo claims so listed or filed are subject to review bythe receiver the debtor company and other creditors and shareholdersequity holders In case anyobjection is raised against a creditorrsquos claim after such review the creditor must bring a lawsuit forconfirmation of claim within one (1) month against all the parties who raised objections

In a bankruptcy procedure creditors should file their claims with the court A prescribed form is usedfor claim filing The claims so filed are subject to review by the trustee the debtor company and othercreditors In case any objection is raised against a creditorrsquos claim after such review the creditor mustbring a lawsuit for confirmation of claim within one (1) month against all the parties who raisedobjections


In a rehabilitation procedure even if a creditor files its claim after the designated filing period the courtpractically allows claims to be filed on or before the close of the second meeting of the interestedparties (which meeting is held for review of rehabilitation plan)

In a bankruptcy procedure a creditor may file its claim at any time after the designated filing period

174

However a creditor should take caution so as not to lose the opportunity to participate in distribution ofbankruptcy estate by late filing


In a rehabilitation procedure there are four types of claims

(i) Common interest claims These are claims specifically recognized under the Act mostly forexpenses and costs necessary for implementing the rehabilitation procedure Most common interestclaims arise after the commencement of the rehabilitation procedure However certain claims arisingbefore the commencement of the rehabilitation procedure including employees wages and certain taxesare also classified as common interest claims Common interest claims must be satisfied as they becomedue without being subject to the rehabilitation procedure

(ii) Rehabilitation secured claims These are rehabilitation claims that are secured by the debtorsproperty as of the commencement of the rehabilitation procedure An example is a loan secured by amortgage

(iii) Rehabilitation claims These are claims against the debtor arising out of causes that took placebefore the commencement of the rehabilitation procedure but they are not secured

(iv) Shareholder claimsequity holder claims

These claims except for common interest claims are paid in accordance with the schedule under arehabilitation plan provided that certain rehabilitation claims and rehabilitation secured claims may bepaid in advance upon court approval These claims may be adjusted by the rehabilitation plan in wholeor in part

A relative priority rule is adopted in a rehabilitation plan (as opposed to an absolute priority rule)Under a relative priority rule instead of recognizing a strict priority creditors with rehabilitationsecured claims creditors with rehabilitation claims and shareholdersequity holders are accordeddifferent treatment based on fair and equitable principles For example creditors with rehabilitationclaims may receive some distribution even if creditors with rehabilitation secured claims are not paid infull

In a bankruptcy procedure a secured creditor can exercise rights with respect to its security interest atany time independently of the bankruptcy procedure The order of priority among other creditors is asfollows

(i) Estate claims These are claims specifically recognized under the Act mostly for expenses and costsnecessary for implementing the bankruptcy procedure Most estate claims arise after the commencementof the bankruptcy procedure However certain claims arising before the commencement of thebankruptcy procedure including employees wages and certain taxes are also classified as estateclaims Estate claims must be satisfied as they become due without being subject to the bankruptcyprocedure

(ii) Bankruptcy claims These are claims against the debtor arising out of causes that took place beforethe commencement of the bankruptcy but they are not secured

(iii) Subordinated bankruptcy claims These are certain claims designated as subordinated bankruptcyclaims including interests damages accrued after the commencement of the bankruptcy proceedingpenalties and fines Creditors with subordinated bankruptcy claims can only participate in distributionsonce all ordinary bankruptcy claims are satisfied in full

175


With respect to filing of claims there are no particularly complex issues other than as already explainedabove



A procedure similar to ldquocram-downrdquo exists in case of a rehabilitation procedure

With respect to a duly submitted rehabilitation plan the third meeting of interested parties is calledwhere each class of interested party votes on the rehabilitation plan The court can approve therehabilitation plan if the required consents are obtained from every class The required consents are asfollows

(i) Class of creditors with rehabilitation secured claims The consent of the creditors holding at least75 (in the case of a rehabilitation plan for continuation of business) or 80 (in the case of arehabilitation plan for liquidation) of the total claim amount of the class is required

(ii) Class of creditors with rehabilitation claims The consent of the creditors holding at least two-thirds of the total claim amount of the class is required

(iii) Class of shareholdersequity holders At least 50 of the voting rights of the class is required Novoting rights are granted to shareholdersequity holders if the debtor companys liabilities exceed itsassets when the rehabilitation procedure is commenced

If the rehabilitation plan is not consented to by one or more classes and the consent of at least one classis obtained the court may approve the rehabilitation plan with certain modifications designed to givefair and equitable protections to the class(es) that did not consent


After the courtrsquos approval of a rehabilitation plan if the rehabilitation plan can be implemented withoutdifficulty the court may conclude the rehabilitation procedure and the debtor recovers its normal statusPlease note that even after the court approves the rehabilitation plan the debtor and the receivercontinue to be subject to court supervision and approval until the conclusion of the rehabilitationprocedure On the other hand if it becomes clear that the debtor cannot implement the rehabilitationplan the court will terminate the rehabilitation procedure and a bankruptcy procedure is commencedagainst the debtor

In a bankruptcy procedure once the final distributions to creditors have been made following theliquidation of the bankruptcy estate a meeting of creditors is convened to make a report on settlement ofthe accounts After the meeting the court decides that the bankruptcy procedure is concluded


In most cases creditor classes consist of two groups namely (i) secured creditors (ie those withrehabilitation secured claims) and (ii) unsecured creditors (ie those with rehabilitation claims) thoughit is possible to classify creditors into three or more classes

176


Are there non-formal procedure available to the company

Please refer to our response in 2-2 above regarding a work-out programme


In case of rehabilitation the Act provides for an early submission of a rehabilitation plan That iscreditors holding 50 or more of the claims against the debtor company are entitled to submit arehabilitation plan at any time after commencement of the rehabilitation procedure Early submission ofa rehabilitation plan has the effect of abridging preparation of the rehabilitation plan and is useful forearly MampA of the debtor company However early submission does not change most of proceduralrequirements such as filing of claims interested parties meeting and so on In this sense itseffectiveness is somewhat limited



The Act basically adopted the Model Law on Cross-Border Insolvency drafted by the UNCITRAL in1997 with certain modifications and provides for recognition and assistance of foreign insolvencyproceedings

Please note that recognition of discharge in a foreign insolvency proceeding is not covered byrecognition and assistance under the Act Instead a foreign courtrsquos decision of discharge in theinsolvency proceeding may be recognized as a judgment of a foreign court based on general rules ofcivil procedure

What is the approach of the companys jurisdiction in respect of foreign proceedings

Recognition and assistance will be granted to a foreign insolvency proceeding whether it is a foreignmain proceeding or a foreign non-main proceeding pending in a state where the debtor company has aplace of business office or domicile

177

Latvia

Vita Liberte Partner Law Firm VARUL

wwwvarulcomen email vitalibertevarulcom tel +371 6722 2237



A pledge right may be established under a contract or a will or by a court ruling If there is reason tobelieve that execution of a court ruling on the matter may become difficult or impossible the court orjudge may take a decision to secure the claim The claim will be secured by entering an interdictory notein the relevant movable property register or any other public register However in practice the securityestablished by court ruling is rather temporary such as in the course of securing claim in the litigationthe assets in the civil process may be used as a means of security The subject matter of a pledge may beall property whose alienation is not specifically prohibited not only existing but also future propertyand both tangible (movable or immovable) and intangible

The key objective of a pledge right is to entitle the creditor to sell the pledge if the debtor defaults on hisobligations Under Latvian law a pledge is valid either on the basis of possession (when it is deliveredto the pledgee) or on the basis of public credibility (when encumbrance notice is entered only in apublic register)

Latvian law prescribes various forms of security as follows

(i) Mortgage on real property and ships

(ii) Possessory pledge on tangible and intangible property

(iii) Commercial pledge on tangible and intangible property

(iv) Chattel mortgage on ships

(v) Usufructuary pledge and

(vi) Financial collateral

Under the Commercial Pledge Law land vehicles vessels aircraft animals and a registered herd maybe encumbered The debtor may pledge all or some of the property of the company or farm The ownerretains his property right ie transactions do not transfer legal title A property is encumbered with theindication that it has been pledged so that the property cannot be freely acquired

Cash in a bank account cannot be the subject matter of a commercial pledge but it may be pledged asfinancial collateral Intangible property also may be pledged Hence under the Commercial Law sharesmay be pledged on the basis of commercial pledge regulations if the articles of association do notprohibit the encumbering of shares A trade mark can be pledged as well according to Law on TradeMarks and Geographical Indications

178

Latvia operates multiple registers such as the Commercial Pledge Register Land Register VesselRegister Movable Property Register Herd Register State Trade Mark Registry Register of Enterprisesand Vehicle Register where encumbrance may be registered A completed form and appropriatedocuments are required to register a pledge according to its type The holder of the register records theapplications received in order of receipt indicating the date of receipt and the sequence numberassigned Therefore the timing of registration is vital where a particular property is to be encumbered inthe same register In that case the ldquofirst-to-filerdquo rule applies This rule ensures credibility and operateson the presumption that an entry is correct unless the other party proves to the contrary and validarguments must be supplied if the decision of the registry officials is to be reversed

Despite the lack of registration in a public register the transaction is binding between the partiesTherefore third parties having acted in good faith may claim damage if the transaction has harmed theirinterests as a result of failure to register or notify in any other way


Validity of a transaction may be challenged on general Civil Law bases

According to the Insolvency Law the administrator of the insolvent company has the duty to evaluate thedebtorrsquos transactions and bring an action to court regarding the recognition of the respective transactionas invalid regardless of the type of transaction if it has been concluded

(i) following the day of the proclamation of the insolvency proceedings of a legal person or threemonths prior to the day of the proclamation of the insolvency proceedings of a legal person and therebylosses have been caused to the debtor regardless of whether the person with whom or for whose benefitthe transaction has been concluded knew or did not know of the losses caused to the creditors

(ii) within three years prior to the day of the proclamation of the insolvency proceedings of a legalperson and thereby losses have been caused to the debtor moreover the person with whom or for whosebenefit the transaction has been concluded knew or should have known of the causing of such losses

The administrator has also the duty to bring an action to court regarding the recognition of the giftagreement of the property of a debtor as invalid

The Insolvency Law provides that a pledge contract is recognised as invalid if the pledge rights havebeen founded after the proclamation of the insolvency proceedings of the debtor

The administrator has the duty to bring an action to court regarding the appeal or discharge of atransaction also against the heirs of the transaction participants

In accordance with the Commercial Law creditors of a company who cannot gain satisfaction for theirclaim against the company may bring an action for the benefit of the company against the followingpersons who have incurred losses for the company but have not compensated them

(i) founders of the company

(ii) persons who has facilitated the malicious or negligent actions of the founders

(iii) persons who in bad faith persuades a member of the board of directors or the council a proctor ora person with a commercial power of attorney to act against the interests of the company or itsshareholders

(iv) members of the board of directors and council

179

Creditors of a company have the right to bring an action within five years from the date when the right tosuch claim was created and this right is not restricted also in the cases if the company has withdrawn itsaction against the person at fault a settlement has been entered into or the losses have occurred in thefulfilment of a decision of the meeting of shareholders or the council


A board member may face civil administrative and criminal liability

According to the Latvian Administrative Violations Code if the debtor fails to submit an insolvencyapplication with the court in the cases specified by the Law a fine and or restriction to hold certainpositions in commercial entities may be imposed on the member of the board of directors

In accordance with the Commercial Law the members of the board of directors and council aresolidarily liable for losses that they have caused to the company A claim for compensation for damagemay be filed by a company in case if members of the board (council) did not act as would an honest andcareful manager

In addition creditors of a company who cannot gain satisfaction for their claim against the company maybring an action for the benefit of the company against the members of the board of directors and councilwho have incurred losses for the company but have not compensated them A board member may causedamages by action and by inaction

A board member may be criminally liable for action or inaction done while he was holding positions ofthe member of the board of the company and in case if competent authorities prove that he or she isguilty of committing a criminal offence intentionally or through negligence has committed an offencewhich is set out in the Criminal Law For example a board member may be liable for arbitrarinessevasion of tax payments and payments equivalent thereto fraud misappropriation etc

The Criminal Law provides criminal liability for a person who commits driving a legal person intoinsolvency if substantial harm is caused thereby to the rights and interests protected by law of anotherperson

Criminal liability is stipulated by the Criminal Law for a person who commits submitting suchapplication for insolvency wherein false information has been provided or there has been concealmentof information if due to the application the insolvency proceedings may be announced or was announced(knowingly untrue insolvency proceedings application)

For a person who commits impeding the course of insolvency proceedings which conduct is manifestedby the representative of the debtor (legal person the subject of the insolvency proceedings) or of anatural person (natural person of the insolvency proceedings) in evading taking part in adjudication ofthe matter or failing to provide or concealing the information requested by the meetings of creditors ofthe legal person the subject of the insolvency proceedings the court or the administrator illegalalienation of property concealing property or transactions non-transference concealing destroying orforging documents or in other intentional acts which delay the course of the insolvency proceedings TheCriminal Law provides criminal liability

2 Taking action


180

In Latvia there are several proceedings aimed at solving financial difficulties of an undertaking

(i) Reorganization proceedings which are regulated by the Commercial Law It is optimal and efficientmechanism of creation or conversion of the legal entity A commercial company may be reorganized byway of merging division or restructuring

(ii) Legal protection proceedings which are regulated by the Insolvency Law It is an aggregate ofmeasures of a legal nature whose purpose is to renew the ability of a debtor to settle their debtobligations if a debtor has come into financial difficulties or expects to do so

(iii) Liquidation proceedings

If the company has enough assets to cover all creditor claims liquidation procedure is applicable It isregulated by the Commercial Law Liquidation is a process of termination of business during which theliquidator recovers debts sells companyrsquos assets and satisfy the claims of creditors

If assets of the company are not enough to cover all of the creditor claims bankruptcy procedure (a partof insolvency proceeding) is applicable It is regulated by the Insolvency Law The insolvencyproceedings of a legal person are an aggregate of measures of a legal nature within the scope of whichthe claims of creditors are settled from the property of a debtor in order to promote the honouring of thedebtorrsquos obligations


The debtor and the creditor is entitled to agree on settling the debts following by the general regulationstipulated in the Civil Law of Latvia


More importance is attached to the protection of the debtoracutes interests in reorganization proceedings ofan undertaking and in legal protection proceedings than in insolvency proceedings For example courtdecision regarding the initiation of a matter of legal protection proceedings has the following effects

(i) a stay of the enforcement of judgments in matters regarding that adjudged and the recovery of theamount not yet recovered and in matters regarding the honouring of obligations through the court inaccordance with the procedure specified in the Civil Procedure Law

(ii) a prohibition for the secured creditor to request the sale of the pledged property of the debtor

(iii) a prohibition for the creditor to submit an application for the insolvency proceedings of a legalperson

(iv) the suspension of the penalty and of the late charge increment etc

Insolvency procedure is considered as more focused on protecting creditors due to the aim of thebankruptcy procedure ndash to sell all of the debtorrsquos property and the funds acquired from the sale shift forsettling the claims of creditors


Insolvency proceedings of a legal person is applied in respect of a legal person partnership individualmerchant or a person registered in a foreign country who performs permanent economic activities inLatvia Insolvency proceedings are applied to a debtor if any of the following features of the insolvency

181

proceedings exists

(i) it has not been possible to execute the court adjudication regarding the recovery of debt from thedebtor

(ii) the debtor has not honoured one or more debt obligations from which the basic debt exceedsamount stipulated by the Insolvency Law and whose deadline has expired and the creditor have issuedor sent a warning to the debtor regarding their intention to submit an application for the insolvencyproceedings

(iii) the debtor has not paid an employee the work remuneration in full compensation for damages inconnection with an accident at work or an occupational disease or has not carried out the mandatorysocial insurance payments within two months following the day specified for payment

(iv) the debtor is unable to honour the debt obligations whose deadline has expired

(v) in accordance with the initial financial report of liquidation the debtor has insufficient assets tosatisfy all the justified claims of the creditors or this condition is discovered during the course ofliquidation

(vi) if a matter of legal protection proceedings has been initiated in respect of a debtor for the secondtime in a year but the implementation of the legal protection proceedings has not been proclaimed

(vii) when implementing the legal protection proceedings a debtor has not performed the activitiesspecified in the Insolvency Law or has provided false information

(viii) a debtor has not implemented the plan of measures of the legal protection proceedings for morethan 30 days and has not submitted the amendments to this plan to court or

(ix) the debtor violates the restrictions of action during legal protection proceedings

(x) if the debtor is unable to honour the obligations specified in the plan of measures of the legalprotection proceedings


In order to start an insolvency proceeding of a legal person an application for insolvency proceedinghave to be submitted with a court where the company has its registered seat Registered seat may bedetermined from the Commercial Registers of Register of Enterprises whose mission is to perform theregistration of legal entities and keeping of the relevant registers

An application for insolvency proceeding must contain the name of the court the firm name registrationnumber and legal address of the creditor and debtor as well as the element of insolvency proceedingsmust be indicated in the application The document proving the payment of the State fee and other courtcosts as well as the document proving the payment of the insolvency proceedings deposit must beattached to application In compliance with the chosen element of insolvency proceedings documentscertifying the reasonableness of chosen element have to be appended to application

For example submitting an application for insolvency proceedings in compliance with the insolvencyelement of impossibility to execute the court adjudication regarding the recovery of debt the creditorhave to append to the application evidence regarding substantiation and amount of the claim as well as astatement issued by the bailiff regarding impossibility to recover the debt from the debtor

182

In order to start a legal protection proceeding a debtor submits with a court where the company has itsregistered seat an application for legal protection proceeding The name of the court the firm nameregistration number and legal address of a debtor have to be indicated in the application Debtor has toindicate non-existence of restrictions specified by the Insolvency Law for initiation of a legal protectionproceeding as well as indicate whether during a year a matter regarding legal protection proceedingshas been initiated in respect of a debtor but implementation of legal protection proceedings has not beenannounced Documents confirming the payment of the State fee and other court costs and conditions bywhich the application is justified have to be appended to the application

After the initiation of a matter of legal protection proceedings in the court a debtor formulates a plan ofmeasures of the legal protection proceedings which is co-ordinated with the creditors and submitted forapproval to court The task of the plan is to ensure that the gain of the creditors not having co-ordinatedthe plan by implementing the legal protection proceedings is at least as large as that if the insolvencyproceedings of a debtor were proclaimed at the moment of the approval of such a plan The followingdocuments have to be appended to the plan of measures of legal protection proceedings

(i) a report on the forecast of proposed cash flow during the first year of the proceedings explaining theitems of the report in the interval of one month while for the subsequent years in the interval of threemonths

(ii) the objections submitted by creditors and not taken into account in respect of the plan of measuresof the legal protection proceedings

(iii) the opinion of the administrator

The Insolvency Law provides also extrajudicial legal protection proceedings where comparing to thelegal protection proceeding the debtor has formulated a plan of measures before commencement of amatter and submits it to a court together with an application for the initiation of a matter of extrajudiciallegal protection proceeding


An application for the insolvency proceedings of a legal person may be submitted to the court where thecompany has its registered legal address by a creditor or creditors a debtor or an administrator Theinsolvency proceedings of a legal person may be commenced by the liquidator of the main proceedings(Article 29(a) of Council Regulation No 13462000) and the proceeding is adjudicated by the courtaccording the location of the main interest centre of the debtor

Comparing to insolvency proceedings only based on debtorrsquos application the court initiates matter oflegal protection proceedings


Both insolvency and legal protection proceedings are effected as judicial proceedings

Courts exercise supervision over the lawfulness of insolvency and legal protection proceedings andperform other duties provided by laws Courts decide on the commencement of proceedings andapproval of plan of measures of legal protection proceedings appointment and discharge of anadministrator and termination of both proceedings (no matter what the basis for termination) confirmamendments to the plan for measures of legal protection proceedings Courts settle all kinds of disputesparticularly disputes related to defending claims but also actions for recovering assets Courts approvestatements of auction submitted by an administrator within insolvency proceedings In addition a courtexercises general supervision over the activities of an administrator

183


The length of an insolvency proceeding depends on the complexity of the case and whether the partieschallenge court rulings made during the proceedings and how the process of defending claims goes As arule bankruptcy proceedings last a year or two However it is not unusual for complex bankruptcyproceedings involving court cases to last for more than two years

The time period for the implementation of legal protection proceedings should not exceed two yearsfrom the day of the coming into effect of the court adjudication Mentioned time period may be extendedby additional two years if the majority of the creditors agree thereto


If the debtor (legal entity) has not honoured one or more debt obligations from which the basic debtamount separately or in total exceeds the amount stipulated by the Insolvency Law and whose deadlinehas expired before submitting an application for insolvency proceedings creditor or creditors have toissue or sent a warning paid by the sender to the legal address of the debtor regarding their intention tosubmit an application for the insolvency proceedings of a legal person and the debtor has not paid theirdebt or raised justified objections to the claim within three weeks following the handing over of thewarning to the postal merchant

If it is impossible to execute the court adjudication regarding the recovery of debt the creditor have toappend to the application regarding commencement of insolvency proceedings a statement issued by thebailiff regarding impossibility to recover the debt from the debtor

If employee of the debtor is submitting an application for insolvency proceedings heshe have to appendto the application a statement issued by the employer regarding the amount of work remuneration andmandatory social insurance payments

If an application for insolvency proceedings is submitted by the debtor evidence that the participants(members) of the commercial company members of the society or other founders or participants of alegal person are informed regarding submission of the application for insolvency proceedings(commonly a letter) and evidence regarding the right of representation (commonly a statement issued bythe Register of Enterprises) have to be append to the application

In submitting an application for the commencement of insolvency proceedings specified in Article 3(2)of Council Regulation No 13462000 a debtor shall append a certification regarding the location ofmain interest centre of the debtor to the application for insolvency proceedings


Before the courtsrsquo decision regarding proclamation of insolvency proceedings the debtor has a right tofile an application for insolvency proceedings object to the application for insolvency proceedings ofthe creditor and participate in the hearing Debtor may request the prosecutor general to submit a protestto the Senate of the Supreme Court regarding a court adjudication that has come into effect hence a courtjudgment regarding proclamation of insolvency proceedings may not be appealed

After the proclamation of insolvency proceedings of a legal person administrator obtain all the rightsduties and responsibilities of administrative bodies provided for in regulatory enactments the articles ofassociation of the debtor or in contracts and heshe alone is representing the interests of the debtorHowever the administrator appoints a representative of the debtor (a member of an executive authoritythe head of a supervisory body) whose participation at the insolvency proceedings is mandatory

184

The representative of a debtor has the following rights

(i) to become acquainted with the claims submitted by creditors and to express the objections againstthem to the administrator

(ii) to request and receive information about the sale of the property of the debtor

(iii) to participate in the creditorsrsquo meeting and become acquainted with the minutes thereof

(iv) to request that the administrator convenes a creditorsrsquo meeting in accordance with the procedurespecified in this Law

(v) to formulate the plan of measures of the legal protection proceedings and

(vi) to lodge a complaint regarding the decision of the creditorsrsquo meeting or the administrator or bringan action to court in accordance with the procedure specified in this Law


After the proclamation of insolvency proceedings of a legal person the debtor loses the right to act withall its property as well as with the property of third persons that is possessed or held by the debtor andsuch a right are acquired by the administrator

In legal protection proceedings however the undertaking continue its economic activities and retaincontrol over its assets and the right to dispose of assets remains with the management of the undertakingor members of a body substituting it Notwithstanding if a debtor performs transaction which exceedamount indicated in the plan of measures of the legal protection proceedings this transaction must be co-ordinated with the administrator The court decision regarding the initiation of a matter of legalprotection proceedings has the effect of a prohibition to perform the liquidation of a debtor andprohibition to perform transactions which are not provided in the plan of measures of the legalprotection proceedings (for example alienation of the real estate if allowed only if it is provided in theplan of measures)


In relation to insolvency proceedings it is important to note that creditors are required to notify theadministrator of all their claims against the debtor which arose before the proclamation of insolvencyproceedings regardless of the basis or the due dates for fulfilment of the claims no later than within onemonth from the day when the entry has been made in the Insolvency Register (publicly accessibleregister) regarding the proclamation of the insolvency proceedings of the debtor

If a creditor has missed the deadline for submitting a claim he may submit claim against the debtorwithin a deadline not exceeding six months from the day when the entry has been made in the InsolvencyRegister but not later than until the day when the plan for settling the creditorsrsquo claims has beenformulated In that case the creditor in question will be included in the Register of Creditorsrsquo Claimshowever this creditor shall not be granted voting rights in the Creditorsrsquo Meetings After deadlinementioned above the creditor will lose his or her creditor status and his or her rights to claim against thedebtor

Important to note that during legal protection proceedings it is prohibited for the secured creditor torequest the sale of the pledged property of the debtor except if the prohibition causes significant harm tothe interests of this creditor (including the existence of the threat of the destruction of the pledgedproperty or the value of the pledged property has reduced significantly) as well as it is prohibited for

185

the creditor to submit an application for the insolvency proceedings of a legal person


No

3 Creditor issues

are unsecured creditors affected

In insolvency proceedings creditorsacute claims not secured by a pledge will be satisfied after the claims ofpledgees have been satisfied In reality their claims are usually either entirely unsatisfied or satisfied toa small extent However only unsecured creditors are granted with voting rights in a Creditorsrsquo Meeting

If the amount of received money of selling the pledged property does not cover the claims of the securedcreditors in full amount the administrator grant the relevant creditors with the status of unsecuredcreditor for the part of the claim not covered and grant with voting rights in a Creditorsrsquo Meeting

The interests of unsecured creditors are better protected in legal protection proceedings than ininsolvency proceedings The plan of measures of legal protection proceedings within the scope of thecreditorsrsquo group and each type of the claim of the creditors may only anticipate the proportionalrepayment or reduction of the basic debt penalty or interest As well as the plan of measures of legalprotection proceedings may provide the postponement of the honouring of payment obligations and orallow the obligation to be performed in installments In case the legal protection proceedings aresuccessful unsecured creditorsrsquo claims are still satisfied to a larger extent than in insolvencyproceedings

The real problem is that debtors often are not able to execute the plan of measures of legal protectionproceedings which is why it often changes into insolvency proceedings and the end result is the same forcreditors whose claim is not secured by a pledge ndash their claims are either entirely unsatisfied or aresatisfied to a very small extent


According to Insolvency Law within insolvency proceedings the sale of the pledged property of thedebtor is taking place in public auctions if the secured creditor has not agreed with the administrator onthe sale of property without an auction By agreeing with the secured creditor on the sale of pledgedproperty the administrator shall ensure that this property is sold for as high price as possible taking intoaccount the interests of unsecured creditors

Besides a secured creditor may request the sale of the pledged property of a debtor in the legalprotection proceedings if prohibition of sale causes significant harm to the interests of this creditor(including the existence of the threat of the destruction of the pledged property or the value of thepledged property has reduced significantly) The decision to permit the sale of the pledged property of adebtor is taken by the court where the legal protection proceedings have been initiated

The plan of measures of legal protection proceedings have to be anticipated the procedure by which theobligations of the debtor against the secured creditor arising from the contract shall be honoured and theregular payments arising from the contract

The Insolvency Law provides that expenditure arising if the pledged property included in the plan of

186

measures of legal protection proceedings is damaged or the value thereof is reduced is the expenditureof insolvency proceedings in the amount of the value of the pledged property of the claim of the securedcreditor or the reduction thereof


A set-off in the insolvency proceedings of a legal person is permitted if the mutual claims of the debtorand creditor have arisen at least six months prior to the proclamation of the insolvency proceedings of alegal person

In the legal protection proceedings the set-off is permitted if the right to claim of the debtor against thecreditor has arisen at least three months prior to the court decision regarding the initiation of the matterof legal protection proceedings


No


No


The Insolvency Law in force do not provide establishment of creditor committee



The administrator leads the debtor in insolvency proceedings and organizes continuation of the businessactivities of the debtor Administrator has the rights and duties of a board member Within two monthsfrom the day of the proclamation of the insolvency proceedings the administrator compiles a plan forthe sale of the debtorrsquos property where the continuing of the business may be provided Theadministrator send the plan to all creditors the debtorrsquos representative and the guarantor (if such exist)and within 15 days from the sending of the plan the creditor and debtorrsquos representative have the right toobject to the administratorrsquos proposal for the method of sale of the non-pledged property of the debtorthe cession of the claims offered and the planned costs of the insolvency proceedings of a legal person

After the initiation of a matter of legal protection proceedings a debtor have to formulate a plan ofmeasures of the legal protection proceedings which have to be co-ordinated with the creditors andapproved by the court The administrator is providing the supervision of the legal protectionproceedings and is providing an opinion regarding the plan of measures The debtor is implementing theplan of measures of legal protection proceedings

In order to ensure the supervision of legal protection proceedings and insolvency proceedings theInsolvency Administration controls the administratorrsquos activities as well as examine complaints aboutthe administratorrsquos actions except the cases when complaints about the administratorrsquos decisions areexamined by the court in which the respective matter was initiated


187

According to the Insolvency Law the expenditure of legal protection proceedings are covered from thedebtors funds

The costs of insolvency proceedings of a legal person are covered from the debtorrsquos property If it isimpossible the costs are covered from the deposit for the insolvency proceedings of a legal personwhich is paid to the administrator as the costs of the insolvency proceedings If it is impossible to coverthe costs of the insolvency proceedings from the debtorrsquos property they may be financed from the fundsof the debtorrsquos representative the administrator creditor creditor groups or other natural person orlegal person and upon the initiative thereof by the persons referred to agreeing thereto in writing withthe administrator if such agreement conforms to the creditorsrsquo interests


Latvia does not have DIP funding However there are no legal obstructions for insolvent company totake a loan within insolvency proceedings The main issue is whether creditor will want to grant a loanto already insolvent company The obligation to return the loan is deemed to be a consolidatedobligation on a general basis


The methods applied in the legal protection proceedings (such us the postponement of the honouring ofpayment obligations) may be applicable to the claims of an employee for work remuneration if theemployee concerned agrees thereto Proportional reduction of claims for work remuneration ofemployees is not applicable if the relevant consent of employee has not been received The status ofcreditor is not applicable to an employee of a debtor in legal protection proceedings The salaries of thedebtorrsquos employees are included in the expenditure of legal protection proceedings and are coveredaccording to the plan of measures of the legal protection proceedings

If debtor has not paid an employee the work remuneration in full compensation for damages inconnection with an accident at work or an occupational disease or has not carried out the mandatorysocial insurance payments within two months following the day specified for payment it is a reason foremployee who has or who has had employment legal relationships with debtor to start insolvencyproceeding of the employer (legal entity) However if the legal protection proceedings is started it isprohibited for creditor (also employee) to submit to court petition to start insolvency procedure of thedebtor

Creditorsrsquo claims of employees against a debtor have to be submitted to the administrator within onemonth from the day when the entry has been made in the Insolvency register regarding the proclamationof the insolvency proceedings of the debtor The administrator take the decision regarding therecognition non-recognition or partial recognition of the creditorrsquos claim of a debtorrsquos employee within15 days following the receipt of this claim Administrator is responsible to submit to the InsolvencyAdministration an application regarding the settling of the claims of employees from the resources of theguarantee fund for employee claims The following claims of employees shall be satisfied from theresources of the employee claims guarantee fund

(i) work remuneration

(ii) reimbursement for annual paid leave

(iii) reimbursement for other types of paid leave

(iv) severance pay in connection with the termination of an employment legal relationship

188

(v) reimbursement for injury in connection with an accident at work or an occupational disease

Claims in respect of such State social insurance mandatory contributions and personal income taxpayments which are associated with the payments referred above also are satisfied from the resourcesof the employee claims guarantee fund

According to the Insolvency Law the employeesrsquo claims are settled from the debtorsrsquo assets aftercovering in full the costs of the insolvency proceedings of a legal person and the claim of the InsolvencyAdministration if the claims of the debtorrsquos employees are settled from the resources of the guaranteefund for employeesrsquo claims The remaining funds of the debtor are divided for the settlement of theremaining claims of non-secured creditors

During insolvency process administrator is entitled to hire and dismiss from work employees includingthose who were employed before the day of the proclamation of the insolvency proceedings of a legalperson

The Insolvency Law states that the Insolvency Administration as a State authority within the scope of thecompetence protects employeesrsquo interests in case of the insolvency of the employer thereof


If the contract entered into by the debtor has not been executed or has been partially executed on the dayof the proclamation of the insolvency proceedings of a legal person the administrator is entitled torequest the execution from the other contracting party or to unilaterally withdraw from the contract Theadministrator has the right to execute the contract if such action does not reduce the debtorrsquos assets Ifthe administrator unilaterally withdraws from the execution of the contract the other contracting partyhas the right to submit his or her creditorrsquos claim

The continuation of the execution of contracts which have not been terminated as well as the executionof the contracts which have been entered into by the administrator on behalf of the debtor with thirdpersons during the insolvency proceedings of a legal person are financed from the debtorrsquos funds

According to the Insolvency Law after proclamation of the insolvency proceedings of the debtor theadministrator has the duty to evaluate the debtorrsquos transactions and bring an action to court regarding therecognition of the respective transaction as invalid regardless of the type of transaction if it has beenconcluded

(i) after or three months prior to the day of the proclamation of the insolvency proceedings of a legalperson and thereby losses have been caused to the debtor


In addition the administrator has the duty to bring an action to court regarding the recognition of the giftagreement of the property of a debtor as invalid

The amounts of money which the debtor has paid for covering the debt within the six months prior to theday of the proclamation of the insolvency proceedings of a legal person as well as after the day of theproclamation of the insolvency proceedings of a legal person (except the amounts of money which theadministrator has paid during the insolvency proceedings of a legal person) must be repaid if at leastone of the conditions stipulated in the Insolvency Law is established

189



The administrator is notified of a claim by a written petition submitted to the administrator The proof ofclaim must set out the content basis and amount of the claim separately referring to the amount of themain claim and the amount of the ancillary claim and whether the claim is secured by a pledgeDocuments proving the circumstances specified in the proof of claim shall be annexed thereto


Creditorsrsquo claims against a debtor shall be submitted to the administrator within one month from the daywhen the entry has been made in the Insolvency Register regarding the proclamation of the insolvencyproceedings of the debtor

If a creditor has missed the deadline for submitting a claim he may submit claim against the debtorwithin a deadline not exceeding six months from the day when the entry has been made in the InsolvencyRegister regarding the proclamation of the insolvency proceedings but not later than until the day whenthe plan for settling the creditorsrsquo claims has been formulated In that case creditor in question will beincluded in the Register of Creditorsrsquo Claims however heshe will not be granted voting rights Afterthis deadline the creditor will lose creditor status and rights to claim against the debtor


The administrator divides the submitted claims of creditors into two groups- claims of secured creditorsand claims of non-secured creditors


No



There are no cram-down procedures stipulated in the Insolvency Law

However the Insolvency Law is providing reorganization of debtor (legal entity) as one of methodsapplied in legal protection proceedings It is applicable only if anticipated in the plan of measures of thelegal protection proceedings The plan of measures of the legal protection proceedings is coordinatedwith creditors and approved by the court Prior to the approval of the court the administrator preparesan opinion regarding such a plan Creditors do not have the right to request security during the processof reorganisation of a debtor

In addition the Insolvency Law is providing transition of an insolvency proceedings in to legalprotection proceedings excepted cases where the court proclaim the insolvency proceedings of a legalperson due to the fact that debtor has not performed required activities of the legal protectionproceedings or did not implement the plan of measures of the legal protection proceedings

190


Insolvency proceedings terminate by restoring solvency of the debtor (for example in case the debtorhas settled all the obligations thereof) the liquidation of the undertaking or with the court adjudicationfor the implementation of the debtorrsquos legal protection proceedings

Insolvency proceedings usually have a liquidating nature Rehabilitation of an undertaking is very rareand mostly it may be achieved by transition of an insolvency proceedings in to legal protectionproceedings

After implementation of administratorrsquos plan for the sale of the debtorrsquos property and the plan forsettling the claims of creditors or after preparation of the report regarding the non-existence of thedebtorrsquos property the administrator submits an application to court for the termination of the insolvencyproceedings of a legal person appending documents which prove the facts mentioned in the applicationThe application sets out information concerning the insolvency process as a whole and particularly themoney received from the sale of debtorrsquos property thereof payments activities of the administratoraccepted claims of creditors expenses and other circumstances relevant to the insolvency proceedingsOnly court may take a decision on termination of insolvency proceedings of a legal person The Registerof Enterprises takes decision on the exclusion of the debtor from the respective register upon receipt ofa State Archive statement regarding the transfer of debtorrsquos documents for storage

Ideally the legal protection proceedings terminate after successful implementation of the plan ofmeasures of the legal protection proceedings by restoring of debtorrsquos solvency A court take a decisionupon receipt of an application of the debtor on termination of legal protection proceedings A writtenopinion of the administrator regarding implementation of the plan for measures of legal protectionproceedings must be appended to the application A court send immediately a true copy of the decisionon termination of legal protection proceedings to the submitter of the application the administrator aswell as the Register of Enterprises that makes entries in the Insolvency Register

A court take a decision upon its one initiative on termination of legal protection proceedings in the caseif

(i) the majority of creditors have not supported the plan of measures of the legal protectionproceedings

(ii) the plan of measures of the legal protection proceedings does not comply with the requirements ofthe Insolvency Law

Legal protection proceedings may be terminated also by proclamation of insolvency proceedings of alegal person In accordance with the Insolvency Law an administrator has the duty to submit anapplication to court for the insolvency proceedings of a legal person concurrently requesting thetermination of legal protection proceedings if

(i) when implementing the legal protection proceedings a debtor has not performed the activitiesspecified in the Insolvency Law or has provided false information

(ii) a debtor has not implemented the plan of measures of the legal protection proceedings for more than30 days and has not submitted the amendments to this plan to court or

(iii) the debtor violates the restrictions of action specified in this Law


191

There is no official statistics regarding the effectiveness of insolvency proceedings But the commonpractice shows that only secured creditors obtain partial reimbursement of claims



A company has the possibility to negotiate privately with the creditors

In some cases a debtor may resolve financial difficulties via reorganization process without startinginsolvency or legal protection proceedings The Commercial Law provides that a company may bereorganized by way of merging division or restructuring Companies involved in the reorganizationprocess may be companies of the same type or various types

If two or more already existing companies are involved in the reorganization process they enter into areorganization agreement where is indicated the information regarding companies involved their sharesexchange coefficient and the amount of premium the division of the capital shares among theshareholders of the acquiring company the provisions for the transfer of the capital shares of theacquiring company to the shareholders of the companies to be acquired divided or restructured etcMentioned agreement is one of the main documents of the reorganization process where restructuring ofdebts also may be provided

Each of the companies involved in the reorganization process submit a notice of reorganization with thedraft agreement appended to the Register of Enterprises and afterwards the information regardingreorganization is promulgated in the newspaper Latvijas Vēstnesis

Each of the companies involved in the reorganization process prepare a reorganization prospectus Ameeting of shareholders of each of the companies involved takes a decision regarding reorganization Inorder to protect creditor interests within fifteen days from the day of taking of mentioned decision eachof the companies inform in writing all of its creditors as well as publish in the official newspaperLatvijas Vēstnesis a notice that a decision on reorganization has been taken

A reorganization is considered as being in effect from the time when recordings have been made in theCommercial Register regarding all the companies involved in the reorganization process


No





If the center of the main interests of a company (COMI) within the meaning of recitals 12 and 13 of thepreamble to Regulation 13462000 is in a EU member state (except Denmark) the insolvency

192

proceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

Secondary insolvency proceedings commenced by a court of another member state are recognized incase Latvian company has its establishment in that state within the meaning of Article 2(h) of theRegulation 13462000

If a decision on declaration of bankruptcy with respect to an Latvian company is made in Denmark orsome other country that is not a member of the EU the decision will be recognized pursuant to theLatvian Civil Procedure Law As a rule a foreign court decision will be recognized in Latvia exceptthe following cases

(i) the foreign court which made the adjudication was not competent in accordance with Latvian lawto adjudicate the dispute or such dispute is an exception jurisdiction of the Latvian courts

(ii) the adjudication of the foreign court has not come into lawful effect

(iii) the defendant was denied a possibility of defending his or her rights especially if the defendantwho has not participated in the adjudication of the matter was not in a timely and proper manner notifiedregarding appearing in court except if the defendant has not appealed such adjudication even though heor she had the possibility to do so

(iv) the adjudication of the foreign court is not compatible with a court adjudication already madeearlier and entered into lawful effect in Latvia in the same dispute between the same parties or withalready earlier commenced court proceedings between the same parties in a Latvian court

(v) the adjudication of the foreign court is not compatible with such already earlier made and enteredinto lawful effect adjudication of another foreign court in the same dispute between the same partieswhich may be recognised or is already recognised in Latvia

(vi) the recognition of the adjudication of the foreign court is in conflict with the public structure ofLatvia or

(vii) in the making the adjudication of the foreign court the law of such state was not applied as shouldhave been applied in conformity with Latvian international private law conflict of law norms

193

Lithuania

Robert Juodka Partner Varul

wwwvarulcomen email robertjuodkavarulcom tel +370 5 248 7337

At the beginning of the questionnaire it shall be noted that in the Republic of Lithuania two types ofprocedures regarding solvency issues of the enterprises exist bankruptcy procedure and restructuringprocedure (both procedures are hereinafter jointly referred to as the insolvency proceedings)Insolvency proceedings shall be considered as a set of measures in order to settle the financial issuesand satisfy interests of creditors Financial difficulties are related to financial state of a company(debtor) when it fails to fulfil undertaken obligations due to the lack of assets However theseprocedures shall be applied under different circumstances and final results of these procedures is likelyto be different

Insolvency proceedings may be invoked when financial difficulties of a debtor resemble the onesindicated in the Law on Enterprise Bankruptcy of the Republic of Lithuania andor in the Law onRestructuring of Enterprises of the Republic of Lithuania

Activities of specific legal entities are regulated by certain legal acts which cover some aspects ofinsolvency proceedings of such legal entities id est the Law on Financial Institutions the Law onBanks the Law on Insurance the Law on Markets in Financial Instruments the Law on the GuaranteeFund and other legal acts of the Republic of Lithuania may be applicable Main objective of these legalacts is not to regulate bankruptcy proceedings of the mentioned legal entities but to establish specificprovisions indicating exemptions or specifics of bankruptcy proceedings compared to the EnterpriseBankruptcy Law



Insolvency proceedings

In order to take security over his assets creditor of the company shall be in compliance with thefollowing conditions established in the Lithuanian Law on Restructuring of Enterprises (hereinafter ndashthe Law on Restructuring) and in the Law on Enterprise Bankruptcy of the Republic of Lithuania(hereinafter ndash the Enterprise Bankruptcy Law)

minus the enterprise has acquired a status of an enterprise under restructuring or bankruptcy

minus the creditor shall within a time period prescribed by the court forward his claims accompanied bythe documents substantiating them and shall also specify how the enterprise has secured the discharge ofthese claims

minus claims submitted by the creditor shall be approved by the court

Only after approval by the court of the creditorrsquos claim the creditor is entitled to take security over hisassets under the procedure established in the Law on Restructuring and in the Enterprise BankruptcyLaw Two types may be distinguished on how a creditor may secure his assets during insolvency

194

proceedings

a) creditorrsquos active participation in the implementation of insolvency proceedings

b) statutory security over creditorrsquos claim

a) Active participation of a creditor in the insolvency proceedings shall be considered as realization bythe creditor of his rights which are granted to him by law and if any actions will be taken by the creditorthese rights will be deemed realized Non-use of such rights does not suspend or violate insolvencyproceedings For example the Law on Restructuring provides that a meeting of creditors1 approves arestructuring plan2 of the enterprise in both insolvency proceedings creditors may ask the insolvencyadministrator or competent bodies of the company for information about how the insolvency proceedingsare implemented and how the interests of creditors are granted and take respective measures to stopactivities which violate interests of creditors thereof3 Therefore the creditors of an enterprise arevested with the power to influence insolvency proceedings by actively participating in theseproceedings

b) The statutory security over creditorrsquos claim is established in the Law on Restructuring and theEnterprise Bankruptcy Law and shall be considered as a procedure of creditorrsquos claim satisfactionsequence whereby one type of creditors have priority before another This sequence cannot be changedand shall be as it is established in the above laws The statutory procedure establishes a sequence andorder of satisfaction of the creditorsrsquo claims obtained from the sale of the assets of the enterprise or bytransferring the assets and shall be as described herein below

Bankruptcy proceedings

Satisfaction of claims secured by mortgagepledge

The creditorrsquos claims secured by pledge andor mortgage shall be satisfied first of all from the proceedsobtained from the sale of the pledged assets of the enterprise or by transferring the pledged assetsWhere the pledged assets are sold at a price higher than the amount of claims secured by the pledgeandor mortgage the remaining balance of the funds shall be allocated for the satisfaction of claims ofother creditors in accordance with the procedure set forth below4

Where the proceeds of the sale of the pledged assets are insufficient the remaining amount of unsatisfiedclaims shall be satisfied in the manner (usually third in line) as specified below

Creditorsrsquo claims secured by pledge andor mortgage shall be satisfied in the manner (first in line) asspecified in point 3 below without exceeding the value of the pledged assets determined by anindependent property appraiser

Stages of satisfaction of claims

All creditorsrsquo claims based on the sequence specified below shall be satisfied in two stages During thefirst stage claims of creditors without the calculated interest and default interest shall be satisfied inaccordance with the sequence established below and during the second stage ndash the remaining creditorsrsquoclaims (interest and default interest) shall be satisfied according to the same sequence

Sequence of satisfaction of claims

First in line for satisfaction shall be claims of the employees relating to employment relations claimsfor the compensation for damage due to mutilation or other bodily injury contraction of an occupationaldisease or death due to an accident at work claims of natural and legal persons for payment for

195

agricultural produce purchased for processing

NB The claims of creditors who have granted new credits to the enterprise during the process ofbankruptcy (ie after initiation of bankruptcy) shall be considered as current payment and shall besatisfied after expiry of payment period and without falling in the procedure of claims satisfactionestablished in this part

Second in line for satisfaction shall stand all the remaining claims of creditors except for the creditorsrsquoclaims of third line (as specified below) including claims for payment of taxes and other payments intothe budget as well as compulsory state social insurance contributions and compulsory health insurancecontributions claims relating to loans granted from the funds borrowed on behalf of the State and loansgranted with the guarantee of the State or guarantee institutions the discharge of whose liabilities isguaranteed by the State relating to assistance granted from the EU funds and remaining creditorsrsquo claimssecured by pledge andor mortgage which were not satisfied from the proceeds of the sale of thepledged assets and which exceed the value of the pledged assets not being sold during the bankruptcyprocess

Third in line for satisfaction shall stand all other usual claims of creditors including the of shareholdersof the enterprise in bankruptcy who became creditors of the enterprise prior to initiation of thebankruptcy proceedings and who alone or together with other participants control the enterprise inbankruptcy (who became creditors of the enterprise both directly and indirectly through parententerprises or subsidiaries or through legal persons of other legal forms they control) that are notrelating to employment relations of such shareholders

During each stage creditorsrsquo claims of each successive sequence shall be satisfied following fullsatisfaction of the creditorsrsquo claims of the preceding sequence of the respective stage If funds areinsufficient to satisfy all the claims of one sequence of one stage in full the said claims shall be satisfiedin proportion to the amount due to each creditor

Restructuring proceedings


During the process of restructuring creditorrsquos claims that are secured by pledge andor mortgage shall besatisfied first from the proceeds of the sale of the enterprisersquos pledged assets Where the proceeds of thesale of the pledged assets are insufficient the remaining amount of unsatisfied claims shall be satisfiedin the manner (second in line) as specified in 3 below

Where the restructuring plan does not provide for the sale of the pledged assets creditorsrsquo claimssecured by pledge andor mortgage shall be satisfied in the manner (first in line) as specified in belowwithout exceeding the threshold value of the pledged assets determined by an independent propertyappraiser

The creditorsrsquo claims secured by pledge andor mortgage to the extent they exceed the value of thepledged assets which are not being sold during the restructuring shall be satisfied in the manner (secondin line) as specified below


All creditorsrsquo claims based on the sequence specified below shall be satisfied in two stages During thefirst stage claims of creditors without the calculated interest and default interest shall be satisfied inaccordance with the sequence established below in and during the second stage ndash the remaining

196

creditorsrsquo claims (interest and default interest) shall be satisfied according to the same sequence


First in line for satisfaction shall stand claims of employees relating to employment relations (includingincome tax of individuals and state social insurance contributions) claims for compensation due tomutilation or other bodily injury contraction of an occupational disease or death due to an accident atwork natural and legal personsrsquo claims for payment for agricultural produce purchased for processingand creditorsrsquo claims secured by pledge andor mortgage not exceeding the value of the pledged assetswhich are not being sold during the restructuring

Second in line for satisfaction shall stand all the remaining claims of creditors except for the creditorsrsquoclaims of third line (as specified below) including claims for compulsory payments and loans grantedfrom the funds borrowed on behalf of the State and loans granted with the State guarantee or guaranteeinstitutions the discharge of whose liabilities is guaranteed by the State claims for assistance grantedfrom the EU funds and remaining creditorsrsquo claims secured by pledge andor mortgage which were notsatisfied from the proceeds of the sale of the pledged assets and which exceed the value of the pledgedassets not being sold during the restructuring process

NB The claims of creditors who have granted new credits to the enterprise during the process ofrestructuring (ie after initiation of restructuring according to the business plan for the period ofrestructuring) that are not secured by pledge andor mortgage which arise following non-repayment ofthese credits by the enterprise within the time limits set in the agreements shall be satisfied before thecreditorsrsquo claims of the Second line Thus some special priority is given to creditors who have givennew loans to the enterprise after initiation of restructuring with the intent of helping the company out

Third in line for satisfaction shall stand usual claims of shareholders of the enterprise underrestructuring who became creditors of the enterprise prior to initiation of the restructuring proceedingsand who alone or together with other participants control the enterprise under restructuring (whobecame creditors of the enterprise both directly and indirectly through parent enterprises or subsidiariesor through legal persons of other legal forms they control) that are not relating to employment relationsof such shareholders


Claims of creditors for whom the time limits for the discharge of liabilities have not expired prior toinitiation of the restructuring proceedings shall be satisfied not earlier than after the expiry of those timelimits

During each stage the creditorsrsquo claims of each successive sequence are satisfied following fullsatisfaction of the creditorsrsquo claims of the respective stage of the preceding sequence If funds areinsufficient to satisfy in full all the claims of one stage of one sequence such claims are satisfied inproportion to the amount due to each creditor

Can transaction entered into by the company be vulnerable to attack


Commencement of the insolvency proceedings determines that claims of the creditors can be satisfied

197

only in the manner provided for above and insolvency administrator is responsible for controlling thisprocedure Initiation of insolvency proceedings causes prohibition to discharge financial obligationsnot discharged before initiation of insolvency proceedings including payment of interest forfeit andother prohibition of set-offs and other restrictions Therefore vulnerability to attack of the transactionsentered into by the company after initiation of insolvency proceedings is not very likely

Below the situations when transactions of the company (usually concluded before initiation ofbankruptcy) can be attacked are described

Creditors are entitled to dispute transactions contrary to the interests of the enterprise andor of itscreditors Such transactions can be disputed before and after the initiation of bankruptcy proceedings

Provisions of the Civil Code of the Republic of Lithuania are also applied in the insolvencyproceedings Possible bases for initiation of claims for invalidation of agreements of the enterprise are

a) general bases (eg agreements contradicting imperative provisions of law public order and goodmorals legal passive capacity of a legal person providing for excessive forfeitpenalties (which shouldbe decreased by the court) etc)

b) specific basis (actio Pauliana)

Actio Pauliana (as a specific type of claim) ensures a creditorrsquos right to challenge transactions made bydebtor (the enterprise) where the debtor was not obliged to conclude them and where they violate therights of the creditor while the debtor knew or ought to have known that prejudiceharm to the creditorwould result from that transaction The creditorrsquos rights shall be considered as violated if by suchtransaction the debtor renders himself insolvent or being insolvent he grants preference to anothercreditor or the rights of the creditor are infringed in any other way

A bilateral transaction may be annulled on the ground mentioned above only if the third personconcluding the transaction with the debtor concerned was in bad faith ie he knew or ought to haveknown that the transaction violates the rights of the debtorrsquos creditor A gratuitous transaction may bealways annulled irrespectively of whether the third person is in good or bad faith

Creditor is also entitled on behalf of the company to submit an Indirect claim In the Lithuanian CivilCode it is established that a creditor whose right to claim against the debtor is certain and executableshall be entitled to exercise the rights of the debtor by bringing an action in the debtorrsquos name in theevent where the debtor fails to implement these rights himself or refuses to exercise them to theprejudice of the creditorrsquos interests (an oblique action)

NB Actio pauliana claim and Indirect claim may be used by the creditors irrespective whetherinsolvency proceedings of the company have been initiated or not


The Law on Bankruptcy establishes that bankruptcy administrator shall not later than within six monthsfrom the receipt of documents on the transactions entered into by the enterprise within a period of atleast 36 months before the initiation of bankruptcy proceedings bring actions in court of the enterprise inbankruptcy for the invalidation of the transactions which are contrary to the objectives of theenterprisersquos activities and which could have led to its inability to settle with the creditors as well as forthe establishment of a fraudulent bankruptcy

If in the hearing the court of the enterprise in bankruptcy establishes this case as a case of fraudulent

198

bankruptcy the administrator must review all transactions of the enterprise in bankruptcy concludedwithin the period of 5 years prior to the initiation of bankruptcy proceedings and bring an action in courtaccording to the location of the registered office of the enterprise in bankruptcy for the invalidation ofthe transactions which are contrary to the interests of the enterprise andor which could have led to itsinability to settle with the creditors In this case it shall be considered that the administrator has learntabout the transactions from the day of receipt of the documents regarding the conclusion of thesetransactions

The bankruptcy administrator is supposed to secure and protect the interests of the creditors and todispute the transactions that are contrary to the interests of the enterprise andor the creditors that wereconcluded before the initiation of bankruptcy proceedings



Civil liability

A director (management body) of the company may be liable under civil administrative or criminalliability

The civil liability of the director has been broadly considered by the Supreme Court of the Republic ofLithuania According to the practice of the Supreme Court of the Republic of Lithuania civil liability ofthe director is determined by the violation of imperative legal obligations (established in the Courtprocess) as well as violation of fiduciary obligations of the director towards the company Concerningthe subject to whom the damage was made civil liability may arise for both the company and thecreditors of the company The company shall act in accordance with the interest of all interestedpersons including the creditors The director of the company must combine these interests and pursueequilibrium thereof If the company performs (or fraudulently does not perform) activities and therebyincreases the losses and debts to creditors such actions shall be considered not to be in compliancewith reasonable business practice and confronting good business standards Therefore civil liability ofthe director may occur not only by when the company is not capable to cover the debts of itrsquos creditorsbut can occur upon violation of specific or fiduciary obligations of the director The usual conditions ofcivil liability (applied in continental law countries) in order for the civil liability of the companydirector to arise have to be established ie a) unlawful actions b) damage caused by unlawful actionsc) causal relation between unlawful actions and the damage d) guild (when unlawful actions areestablished which caused the damage guilt shall be assumed) Therefore the claimant has no obligationto prove guilt of the director This assumption can be denied by the director in the proceedings

Civil liability (bankruptcy proceedings)

In the Enterprise Bankruptcy Law it is established that a director of the enterprise or any other person(persons) having the right to adopt a respective decision in the enterprise must compensate the damageincurred by the creditors due to the enterprise missing the deadline for filing with the court of a petitionfor initiation of bankruptcy proceedings

Civil liability (restructuring proceedings)

In the Law on Restructuring no provisions regarding liability of the management bodies of the enterpriseare established due to failure to adopt a decision to initiate enterprise restructuring proceedingsLiability of the director arising because of the damage incurred by the company or creditors shall besubstantiated following the points 311 above

199

Administrative liability

Administrative liability of the director may arise because of violation of company creditorsrsquo rights andinterests Thus at the same time civil and administrative liability may arise

Criminal liability

Criminal liability for a member of a managing body may arise if he performs criminal acts (eg fraudtheft and other) and it shall cause damages to the aggrieved party For example squandering of propertyof the company may be a basis for application of criminal liability

2 Taking action


There are two types of insolvency proceedings bankruptcy proceedings and restructuring proceedingsThree types of bankruptcy processes exists in Lithuania judicial bankruptcy process5 extrajudicialbankruptcy process and simplified bankruptcy process Restructuring processes of the enterprise aresubdivided to judicial and simplified restructuring proceedings6

The main objective of the enterprise bankruptcy is to protect and satisfy the interests of the creditorsSuch purpose mostly is achieved through the sale of assets of the debtor in bankruptcy Initiation ofenterprise bankruptcy proceedings usually causes termination of an enterprisersquos economic activity Afterdeclaration by the court of the enterprise as bankrupt the enterprise is liquidated unless composition(peace) agreement with the creditors is concluded

Objective of the enterprise restructuring proceedings is to satisfy interests of the creditors settle thedebts avert bankruptcy and maintain and continue activities of the debtor (enterprise) Thereforeinterests of the creditors are satisfied in the future Such insolvency proceedings are used for thedebtors which are close to economic difficulties or in such difficulties but still have a potentially viablebusiness Financial difficulties of the company mean that an enterprise is unable to discharge itsobligations and reduce losses which without assistance rendered by creditors would force it toterminate its activities and go bankrupt Therefore if the restructuring procedure is not applied to thecompany it is very likely that company will become insolvent and as a consequence bankruptcy processwill be initiated



The Enterprise Bankruptcy Law establishes that creditors notify the enterprise in writing of the intentionto file with the court a petition for initiation of bankruptcy proceedings There are no direct statements inthe Enterprise Bankruptcy Law that this shall be considered to be a so called informal (pre-insolvency)proceeding but the Supreme Court of the Republic of Lithuania stated that by this provision a pre-insolvency procedure stage is established Pre-insolvency procedure shall be considered as anestablished period of time during which obligations of the creditor shall be discharged

Pre-insolvency procedure shall be considered as implemented if the following procedure is realizednotification of the debtor by the creditor of itrsquos intention to initiate bankruptcy procedures if theobligations of the debtor indicated in the notification will be failed to discharge Creditors shall set a

200

period of at least 30 days for discharge of the obligations

In case of infringement of the pre-insolvency procedure the court shall not initiate bankruptcyproceedings or should terminate the bankruptcy procedure in case it has already been initiatedNevertheless infringement of the pre-insolvency procedure does not preclude the creditors to initiatethe bankruptcy process again but the pre-insolvency procedure has to be exercised in an appropriatemanner


There are no informal (pre-insolvency) procedure established regarding restructuring of the companyDefinitely the company (debtor) and itlsquos creditors may settle their obligations without engaging in therestructuring process

Which procedures are creditor-friendly debtor-friendly


The following procedures may be considered as debtor friendly

minus the provision that claims of the company creditors in the enterprise bankruptcy proceedings aresubmitted to the court within a period determined by the court from the date of entry into force of thecourtrsquos ruling on initiation of the enterprise bankruptcy proceedings the period shall not exceed 45calendar days After the expiry of time period the creditors are not entitled to submit their claims unlessthe court approves such claims by the reason that the time period was omitted due to important reasons

minus the continuation of the contracts by further execution of which the debtor receives benefit

minus restrictions related to the execution of transactions from the date of coming into effect of the courtruling to initiate the enterprise bankruptcy (please see above)

minus prohibition for the court to adopt a ruling initiating bankruptcy proceedings if the enterpriserestructuring proceedings are initiated or postponement of the initiation of bankruptcy proceedings if apetition for the initiation of restructuring proceedings is received during the examination of the petitionfor the initiation of bankruptcy proceedings and the court ruling to initiate bankruptcy proceedings hasnot yet been adopted

minus prohibition to initiate enterprise bankruptcy proceedings or terminate them if pre-insolvency stage wasinfringed (please see above)

minus etc

The following procedures may be considered as creditor friendly

minus examination of the transactions entered into by the enterprise in bankruptcy within a period of at least36 months before the initiation of bankruptcy proceedings

minus submission of the claims after omission the aforementioned 45 days time period when importantreasons exist

minus right to receive information regarding execution of the bankruptcy proceedings

minus right to apply to the court regarding replacement of the administrator

201

minus right to request the bankruptcy administrator to present reports about his activity during bankruptcyproceedings and right to approve or refuse the approval of these reports (right of the meeting ofcreditors)

minus right to make decision regarding the continuity renewal restriction or termination of economic andcommercial activities of the enterprise on the approval of the price estimate for sale of the assets etcimposition of restrictions on the disposal of the assets of the enterprise (right of the meeting ofcreditors)

minus right to adopt a resolution on the conclusion of a peace agreement (composition) with the debtor (rightof the meeting of creditors)

minus in case of extrajudicial enterprise bankruptcy procedures right to adopt resolutions which would beadopted by the court in case of judicial or extrajudicial bankruptcy processes (the right of the meeting ofcreditors)

minus etc



minus the provision that claims of the companyrsquos creditorsrsquo in enterprise restructuring proceedings aresubmitted to the court within a period determined by the court from the date of entry into force of thecourt ruling on initiation of the enterprise restructuring proceedings the period shall not exceed 45calendar days After the expiry of the time period creditors are not entitled to submit their claims unlessthe court accepts such claims by the reason that the time period was omitted due to important reasons

minus restrictions related to the execution of transactions from the date of coming into effect of the courtruling to initiate the enterprise restructuring proceedings to the date of adoption of the court ruling toapprove the restructuring plan (please see above)

minus reception of assistance with regard to the discharge of liabilities which arose before the initiation ofthe enterprise restructuring proceedings ie to extend the deadlines for the discharge of claims waiveall claims (or a part thereof) replace a pecuniary obligations by any other obligation to give a consentfor the enterprise to settle with creditors from the assets and shares of the enterprise

minus extension of the duration of the restructuring period

minus and etc


minus right to receive information regarding implementation of the restructuring plan

minus right to submit proposals to the restructuring administrator or the management body of the enterprise inrelation to the restructuring plan

minus right to apply to the meeting of creditors in relation to the activities of the restructuring administratoror replacement thereof

minus right to appeal in court against the resolutions adopted by the meeting (committee) of creditors

202


minus right to approve of refuse to approve the enterprise restructuring plan (the right of the meeting ofcreditors)

minus right to apply to court regarding the restriction of the competence of the management bodies of theenterprise and specify to whom these functions shall be transferred (the right of the meeting ofcreditors)

minus right to endorse the proposal to the restructuring administrator to apply to court for termination of theenterprise restructuring proceedings in the event of failure to implement or improper implementation ofthe restructuring plan or to apply to court for termination of the enterprise restructuring proceedingswhere this is approved by the creditors the amount of whose claims in terms of value accounts for atleast 23 in terms of value of the amount of all the confirmed claims of creditors (the right of themeeting of creditors)

What are triggers for insolvency


The court initiates bankruptcy proceedings in presence of at least one of the following conditions

minus the enterprise is insolvent or the enterprise is late with payment of remuneration and amounts relatingto employment relations to an employee (employees)

minus the enterprise has publicly announced or notified the creditors in any other manner of its inability orlack of intent to discharge its obligations

Insolvency of the enterprise means the state of an enterprise when it fails to discharge its obligations andthe overdue obligations of the enterprise are in excess of half of the value of the assets entered into theenterprisersquos balance sheet


In order to apply restructuring proceedings of the enterprise the following conditions shall be met

minus the enterprise is in financial difficulties or there is a real possibility that it will be in financialdifficulties within the next three months

minus the enterprise has not discontinued its activities

minus the enterprise is not in bankruptcy or has not gone bankrupt

minus bankruptcy proceedings have not been initiated

The enterprise is considered to be in financial difficultiesfinancial distress what means that anenterprise is unable to discharge its obligations and reduce losses which without assistance rendered bycreditors would force it to terminate its activities and go bankrupt The difference between insolvencyof an enterprise and an enterprise in financial difficulties is that overdue obligations of the enterprise infinancial difficulties are not in excess of half of the value of the assets entered into the enterprisersquosbalance sheet

What is the process for filling

203


Bankruptcy proceedings are executed according to the rules established in the Code of Civil Procedureof the Republic of Lithuania and specific rules of the Enterprise Bankruptcy Law In order to commenceinsolvency procedure the following requirements shall be satisfied

minus legitimate subjects apply for the initiation of a bankruptcy case

minus form and content satisfy general requirements set forth in the Code of Civil Procedure of the Republicof Lithuania and specific requirements set forth in the Enterprise Bankruptcy Law

minus pre-insolvency proceedings are applied in compliance with the Enterprise Bankruptcy Law

Petition to the court for initiation of bankruptcy proceedings can be filed if at least one of the followingconditions is present

minus the enterprise fails to pay the salary and other employment-related amounts in due time

minus the enterprise fails in due time to pay for the goods received and works carried out defaults on therepayment of credits and fails to discharge other property obligations assumed under transactions

minus the enterprise fails to pay in due time taxes and other compulsory contributions prescribed by andorthe awarded amounts


minus the enterprise has no assets or income from which debts could be recovered and therefore the bailiffhas returned the writs of execution to the creditor

Reasons of the petition for the initiation of bankruptcy proceedings have to be indicated in the petitionThe petition to the court has to be accompanied by the lists of creditors and debtors of the enterpriseindicating their addresses amounts of liabilities and debts and the time limits for the settlement thereofa set of financial statements for the previous financial year and the period of the reporting financial yearprior to the date of filing of the petition and information relating to the proceedings initiated in courtsand recoveries without suit the pledged assets and other obligations


Restructuring proceedings are executed according to the rules established in the Code of CivilProcedure of the Republic of Lithuania and specific rules of the Law on Restructuring of Enterprises Inorder to commence insolvency procedure the following requirements are met

minus legitimate subjects apply for the initiation of a restructuring case

minus form and content of the application satisfy general requirements set forth in the Code of CivilProcedure of the Republic of Lithuania and specific requirements set forth in the Law on Restructuring

In order to apply for restructuring proceedings of the enterprise the following conditions shall be met

minus an enterprise is in financial difficulties or there is a real possibility that it will be in financialdifficulties within the next three months

204

minus an enterprise has not discontinued its activities

minus an enterprise is not in bankruptcy or has not gone bankrupt


If the enterprise resembles preconditions established for initiation of restructuring proceedings thenparticipants andor owners of an enterprise are entitled according to the Law on Restructuring to submita claim for the initiation of restructuring proceedings The claim has to cover reasons for filing by theenterprise of a petition for the initiation of bankruptcy proceedings list of creditors and debtors of theenterprise amounts of liabilities and debts and time limits for the settlement thereof set of financialstatements list of pledged assets and other obligations

These subjects may file the initiation application to the court after the confirmation of guidelines forrestructuring plan and after the confirmation of candidacy of the restructuring administrator proposed bythe management body of the enterprise The management body of an enterprise has to not later thanwithin five working days after the date of adoption of the decision file a petition to the court on initiationof the enterprise restructuring proceedings

The petition on initiation of the enterprise restructuring proceedings has to be accompanied by thefollowing

minus reason(s) due to which the initiation of the enterprise restructuring is sought for

minus documents certifying that the enterprise complies with the grounds for the initiation of restructuringproceedings

minus guidelines for the restructuring plan and the decision on approval of the guidelines by the meeting ofparticipants or owner of the enterprise

minus a copy of the set of financial statements for the previous financial year and a copy of the balance-sheetand profit (loss) statement for the period of the reporting financial year

minus candidacy of the restructuring administrator



The following persons have the right to file a petition to the court for the initiation of enterprisebankruptcy proceedings

minus creditors

minus owners

minus the head of the enterprise (director of general director)


Subjects entitled to file the initiation of the enterprise restructuring proceedings to the court are

minus meeting of participants (shareholders) of the enterprise

205

minus owners of the enterprise



The court is a subject of the enterprise bankruptcy proceedings and is responsible for effective and justhearing of the bankruptcy case Bankruptcy of the companies may influence social and economic life ofthe country thus the public interest exists in bankruptcy cases Therefore the court shall be active in theproceedings and is responsible for proper and timely execution of the bankruptcy case The generalprinciples of civil procedure such as disposition competition equality of the parties and otherprinciples may be restricted in bankruptcy proceedings However it does not mean that the court in thebankruptcy proceedings shall collect evidences on its own initiative unless the court considers that it isnecessary to act so in order to resolve the case justly


During the restructuring process interests of the creditors employees and the company in debt are beingpursued to save the company from bankruptcy It is certain that this process may have influence not onlyfor few private persons but for the economy and budget of the country Thus public interest exists in theenterprise restructuring cases and the court solving such cases shall act actively The general principlesof civil procedure such as disposition competition equality of the parties and other principles may berestricted in the restructuring proceedings and vested to the competence of the court However it doesnot mean that the court in the restructuring proceedings shall collect evidences at its own initiativeunless the court considers that it is necessary to act so in order to resolve the case justly



The length of bankruptcy proceedings depends on the complexity of the case and whether the partieschallenge the court andor creditor meetingadministrator rulings made during the proceedings and howthe process of elaboration of such claims proceeds According to the general practice bankruptcy of anenterprise lasts from 1 to 25 years on the average


As the length of restructuring proceedings depends on the complexity of the case and whether the partieschallenge the court andor creditor meetingadministrator rulings made during the proceedings and howthe process of elaboration of such claims proceeds The Law on Restructuring provides thatrestructuring of the enterprise shall not exceed 4 years after approval of the restructuring plan whichshall be approved within 6 months after the courtrsquos ruling to initiate restructuring proceedings of theenterprise Restructuring may not last longer than 4 years The management body of the enterprise or therestructuring administrator may by a decision of the meeting of creditors file a petition with the courtfor extension of the enterprise restructuring period The court or a judge may extend the duration ofrestructuring period but not longer than for a period of one year According to the general practicerestructuring of the enterprise lasts from 3 to 5 years on average


General principle of the insolvency proceedings and the law is that any of the claims submitted shouldbe substantiated For example the mere statement that conditions for initiation of insolvency proceedingsexist (please see above) will not be a sufficient basis for the court to initiate insolvency proceedings

206

therefore it has to be substantiated Thus if the creditor is willing that his claims would be approved heshall substantiate it with proper evidence for example proof showing that debtor failed to fulfil hiscontractual obligations etc


Company as a debtor benefits from rights established in the part 3 of the chapter II Also the owners ofthe company in bankruptcy are entitled to participate in the meetings of creditors Management bodies ofthe enterprise (if they stay in office in case of restructuring) are entitled to participate in the meeting ofcreditors and etc


A person responsible for administration of the bankruptcy proceedings is a bankruptcy administrator ndashwho is a natural or a legal person appointed by the court having the right to provide bankruptcyadministration services Bankruptcy administrator is responsible for the bankruptcy procedure hecontrols uses and possess the assets and funds of the enterprise in bankruptcy The administrator alsoensures the security of assets guides the commercial activity secures creditorsrsquo rights executesbankruptcy proceedings of the enterprise in bankruptcy etc

A person responsible for the administration of the restructuring proceedings is a restructuringadministrator ndash a natural or legal person appointed by the court having the right to provide restructuringadministration services Restructuring administrator according to the Law on Restructuring isresponsible to take measures to draft submit for approval and implement a restructuring plan within thetime limits supervise the activities of the management bodies of the enterprise convene the meetings ofcreditors participants (shareholders) of the enterprise owners thereof participate in the meetings andsittings of all the management bodies of the enterprise and the meetings of creditors indicate to themembers of management bodies the shortcomings in their activities and set a time limit for eliminationof those shortcomings



The bellow provided proceedings may be considered as red-flags in the enterprise bankruptcy process

Material implications

minus Important issue in bankruptcy proceedings is the issue of the bankruptcy administrator and whether thebankruptcy administrator will be more inclined to support and represent the interests of the formershareholders of the enterprise or the interests of some of the biggest creditors A person initiating thebankruptcy proceedings proposes a candidacy of a bankruptcy administrator that should be approved bythe court

minus Second important issue is the issue of being able to control the decisions taken in the Creditorrsquosmeeting Thus it is important to have a majority of claims (directly or via friendly claims) that wouldensure a 51 majority of votes in the Creditorrsquos meeting

If a 51 majority cannot be achieved a smaller majority may also be useful if other creditors are smalland are not able to duly follow the process of bankruptcy as well as participate in all the meetings ofcreditors

minus In connection to the above it must be noted that only claims that are approved by the court are eligible

207

for voting at the creditorrsquos meeting so it is important to achieve that the bankruptcy administrator wouldnot contest the approval of creditorrsquos claims Claims that are not approved and are being contested incourt may not vote at the meetings of creditors until their approval by court

minus It is also important to understand that the chairman of the meeting of creditors has additional powers toreceive information and interact with the bankruptcy administrator on an official level therefore thechairman of the meeting of creditors may influence the bankruptcy procedure

minus The creditorsrsquo committee is formed from representatives of creditors who are voted for by the meetingof creditors and exercises all the rights of the meeting of creditors in between the meetings of creditorsHowever contrary to the usual principle of voting each member of a creditorsrsquo committee has one voteand not a proportion from overall votes Thus a creditor with a smaller claim may exercise much moreinfluence if elected to the creditorsrsquo committee

minus The meeting of creditors approves the procedures of sale of the assets of the enterprise and the startingsale prices of the assets in an auction (these are by custom being prepared and proposed by thebankruptcy administrator) Therefore it is important not to miss this vote and achieve a favourable salesprocedure and a favourable starting price in the auction

Formal procedural implications

minus establishment of a period (by the creditors) of at least 30 days from the date of delivery of thenotification for the discharge of liabilities before initiation of the enterprise bankruptcy proceedings

minus initiation of the enterprise bankruptcy proceedings

minus ruling of the court to commence or refuse to commence the bankruptcy proceedings of the enterprise

minus transfer of the assets (by the management bodies of the enterprise) of the enterprise to the bankruptcyadministrator

minus loss of power of the management bodies of the enterprise

minus notification by the bankruptcy administrator to the persons concerned that he will not execute thecontracts which have been entered into by the enterprise and which period of execution has not yetexpired

minus submission and confirmation of the creditors claims

minus convention of the first and later meeting of creditors

minus declaration of the enterprise as bankrupt Upon hearing the bankruptcy case the court shall declare theenterprise bankrupt and adopt a ruling to put the enterprise into liquidation if no ruling to conclude apeace agreement with the creditors is adopted within 3 months from the entry into force of the ruling toconfirm the creditorsrsquo claims the court may extend the time limit only if so requested by the meeting ofcreditors Upon declaring the enterprise bankrupt and adopting a ruling to put the enterprise intoliquidation by reason of bankruptcy the court shall confirm the amount of revised claims of eachcreditor the procedure of liquidation other orders and instructions necessary for carrying out theliquidation procedure

minus sale and transfer of assets Procedure for the sale and transfer of assets (shall not exceed 24 months)

minus removal from the Register of Legal Entities of the companyrsquos data Bankruptcy administrator shall not

208

later than within 5 working days from the entry into force of the court decision regarding the terminationof the enterprise submit an application to the Register of Legal Entities for the removal from the registerof the enterprise liquidated by reason of bankruptcy

It shall be noted that commencement of bankruptcy proceedings supposes respective effects which arethe following

minus stay of proceedings - the discharge of all financial obligations not discharged prior to the initiation ofbankruptcy proceedings including the payment of interest forfeit taxes and other compulsorycontributions and the recovery of debts from the enterprise through court or without suit except for set-off where such set-off is permitted under the provisions of set-off of tax overpayment (difference)provided is prohibited Calculation of forfeit and interest on all obligations of the enterprise includinglate payment of amounts relating to employment relations terminates

minus if within 30 days from the entry into force of the ruling to initiate bankruptcy proceedings thebankruptcy administrator notifies the persons concerned that he will not execute the contracts whichhave been entered into by the enterprise and which period of execution has not yet expired theaforementioned contracts except for the employment contracts and contracts from which the rights ofclaim of the enterprise in bankruptcy arise are deemed to have expired


The bellow provided proceedings may be considered as red-flags in the enterprise restructuringprocess


minus As in the bankruptcy proceedings it is important that in restructuring proceedings the administratorwould be ldquofriendlyrdquo and would not oppose to the initiatives of the creditors This however is not soimportant as in bankruptcy because in a restructuring process the management bodies of the company donot cease to have their powers and are still running the company whereas the administrator mostlyoversees the activities of the management bodies

minus In a restructuring process it is of utmost importance to gather a 23 majority of friendly or neutralcreditors at the meeting of creditors in order to approve the restructuring plan If a restructuring plan isnot approved the process of restructuring cannot start

minus The process of drafting of the restructuring plan and its contents are also very important as accordingto it the repayment of creditorrsquos claims will be performed It is always important to keep control of thedrafting of the restructuring plan

minus Due performance of the approved restructuring plan is also very important as failure to perform it mayresult in termination of the restructuring process and initiation of bankruptcy


minus preparation of the documents regarding initiation of the enterprise restructuring proceedings(preparatory stage please refer to the part 4 of chapter II)

minus the decision of the management body to file the petition to the court on initiation of restructuringproceedings

minus ruling of the court to commence or refuse to commence restructuring proceedings of the enterprise

209


minus preparation of the restructuring plan of the enterprise

minus sale and transfer of assets satisfaction of creditors claims (shall not exceed 24 months)

minus decision to approve or refuse to approve the restructuring plan of the enterprise

minus closure of the enterprise restructuring Upon the implementation of the restructuring plan themanagement body shall within 10 working days prepare a statement on the implementation of therestructuring plan Upon receiving the statement the court shall adopt a decision to approve thesubmitted statement on implementation of the restructuring plan and close the enterprise restructuringproceedings Restructuring administrator shall within 5 working days from the date of coming intoeffect of the court decision to terminate the enterprise restructuring proceedings notify respectivepersons

Great importance in the restructuring proceedings is paid to the restructuring plan which is a measure toachieve the objectives of restructuring within a certain period of time and includes the information howto settle the financial difficulties and satisfy claims of creditors Restructuring plan includes thefollowing information

minus the aims and duration of restructuring

minus business plan of an enterprise for the period of restructuring

minus a list of creditors the amounts of their claims and time limits for the satisfaction thereof

minus anticipated assistance of creditors with regard to the discharge of debt liabilities which arose beforethe initiation of the enterprise restructuring proceedings in court

minus a list of debtors of the enterprise

minus duration of restructuring of the enterprise

minus an estimate of administrative expenses

minus and etc

minus and etc

It shall be noted that the Law on Restructuring establishes certain restrictions related to the execution oftransactions from the date of coming into effect of the court ruling to initiate the enterprise restructuringproceedings to the date of adoption of the court ruling to approve the restructuring plan and they are thefollowing

minus a general prohibition to discharge all the pecuniary obligations which were not discharged before thedate of coming into effect of the court ruling to initiate the enterprisersquos restructuring proceedingsincluding the payment of interest default interest and other compulsory payments to recover debts fromthe enterprise in judicial or extrajudicial proceedings to apply judicial pledge servitudes usufruct tooffset claims to pledge sell or otherwise transfer the assets of the enterprise necessary for continuationof its activities is valid

minus calculation of forfeit and interest for all the obligations of the enterprise which have accrued before

210

the date of coming into effect of the court ruling to initiate the enterprisersquos restructuring proceedings issuspended

minus suspension of recovery under writs of execution and set-off of claims

However during the above mentioned period the enterprise shall in the usual manner pay all of its on-going payments and obligations


No

3 Creditor issues


Unsecured creditors in the insolvency proceedings are affected by the sequence of satisfaction of claims(refer to the part 1 of chapter I)



In the Enterprise Bankruptcy Law the following procedure how to enforce a secured claim isestablished

1) immovable property and pledged assets are sold at auction in accordance with procedure laid downby the Government of the Republic of Lithuania

2) animals products and other easily perishable products or assets which are likely to quickly lose theircommercial value are sold at a price set by the administrator taking into account the actual transactionprices of analogous goods on the market

3) the procedure for sale of other assets as well as immovable property unsold at two auctions isestablished by the meeting of creditors Upon decision of the meeting of creditors these assets may besold in accordance with procedure established by the meeting of creditors

4) the securities (shares bonds and other securities) held by the enterprise in bankruptcy or a bankruptenterprise must be sold in accordance with the procedure laid down by legal acts regulating trading insecurities

Unsold assets may be transferred to the ownership of creditors Where the sale of themortgagedpledged assets has been announced prior to the date of initiation of bankruptcy proceedingsthe bailiff completes the sale of the assets in accordance with the procedure laid down in the Code ofCivil Procedure and upon the sale of the assets at auction transfers the proceeds to the account of theenterprise in bankruptcy

Procedure of sale of pledgedmortgaged assets of the company

The procedure of the sale of company assets is established in the Instructions on Procedure of Sale ofAssets of Bankrupt Companies by Public Auction approved by the Government of the Republic of

211

Lithuania (hereinafter ndash the Instructions) The bankruptcy administrator is responsible for executing thepublic auction According to the Instructions the procedure of a public auction shall be as follows

minus meeting of creditors sets down the starting price of the Companyrsquos assets

minus the bankruptcy administrator shall no later than 30 days before the auction transfer required dataregarding initiation of the auction to the competent institution

minus the winner of the auction shall within 15 days from the day of the auction provide the bankruptcyadministrator with a confirmation regarding full payment for the property the winner has bought in theauction

minus the bankruptcy administrator after receiving the confirmation regarding payment for the property soldin the auction shall conclude a deed of the auction Chairman of the meeting of creditors shall approvethe deed of auction If the winner of the auctions fails to pay the price for the property in full the auctionshall be considered as failed

minus If the auction shall be considered to have failed the bankruptcy administrator shall not earlier than 10days and not later than 30 days after the declaration about the failure of the first auction organize asecond auction

minus if the winner of such second auction fails to make full payment for the assets in 15 days a repetitiveauction shall be held

minus If the assets are not sold in the second and in the repetitive auction they may be transferred to theownership of the pledgeemortgagee

minus how to use the assets that were not sold during the second or the repetitive auction shall be decidedupon by the creditors whose claims have not been satisfied

The procedure for sale and transfer of assets should not exceed 24 months


Sale of the mortgagedpledged company assets during the process of restructuring of the company shallbe established in the restructuring plan of the company As the restructuring plan shall be approved bythe meeting of creditors the creditors of the company have great influence on establishment of thecompany asset sale procedure



Set-off after the courtrsquos initiation of the bankruptcy proceedings is prohibited except for set-off wheresuch set-off is permitted under the provisions of set-off of tax overpayment (difference) provided for inthe tax legislation


Any kind of set-off after courtrsquos initiation of restructuring proceedings until courtrsquos approval ofrestructuring plan is prohibited


212

No

Is creditor resource available in respect of any company affiliates

No



Committee of creditors may be elected by the first and subsequent meetings of creditors The committeeof creditors controls the course of insolvency process the activities of the administrator protects theinterests of creditors in the periods between the meetings of creditors Rights of the committee ofcreditors are established by the meeting of creditors Each member of the committee has one vote Thecommittee of creditors adopts resolutions by simple majority vote and in the event of a tie thechairmanrsquos vote is the casting one


Meeting of creditors is a body that generates resolutions of creditors Resolutions are adopted by votingin the meeting of creditors Thereupon creditors may decide to embody their rights not directly but in theperiods between the meetings of creditors through the Creditorsrsquo Committee elected by the meeting ofcreditors The Chairman of the meeting of creditors shall also be the Chairman of the CreditorsrsquoCommittee Election of the Creditorsrsquo Committee is not mandatory

The committee must be formed of at least 5 persons One person has one vote At least one personrepresenting the interests of employees of the company in the bankruptcy proceedings has to be elected amember of the Creditorrsquos committee The Creditorsrsquo Committee supervises the process of bankruptcythe activities of the administrator and defends the interests of creditors in periods between the meetingsof creditors The rights and powers of the Creditorsrsquo Committee are established and set down by themeeting of creditors

A Meeting of a Creditorsrsquo Committee is deemed to have occurred lawfully if the meeting is attended bymore than half of its members Decisions are adopted by a simple majority vote in case of a tie thechairmanrsquos vote is the casting one

Restructuring proceeding

Meeting of creditors is a body that generates resolutions of creditors Resolutions are realized by votingin the meeting of creditors Resolutions are adopted by voting in the meeting of creditors Thereuponcreditors may decide to embody their rights not directly but in the periods between the meetings ofcreditors through the Creditorsrsquo Committee elected by the meeting of creditors The Chairman of themeeting of creditors shall also be the Chairman of the Creditorsrsquo Committee Election of the CreditorsrsquoCommittee is not mandatory

The Committee must be formed of at least 5 persons One person has one vote At least one personrepresenting the interests of employees of the company in the restructuring proceedings has to be electeda member of the Creditorrsquos committee The Creditorsrsquo Committee performs the functions assigned to itby the meeting of creditors and defends the interests of creditors in periods between the meetings ofcreditors The rights and powers of the Creditorsrsquo Committee are established and set down by themeeting of creditors

A Meeting of a Creditorsrsquo Committee is deemed to have occurred lawfully if the meeting is attended by

213

more than half of its members Decisions are adopted by a simple majority vote in case of a tie thechairmanrsquos vote is the casting one




Commencement of bankruptcy proceedings determines that the management bodies of the enterprise (orowner) transfer to the bankruptcy administrator the assets of the enterprise according to the balancesheet drawn up on the basis of the data available on the day of entry into force of the ruling to initiatebankruptcy proceedings and all the documents within the time limits set by the court The managementbodies of the enterprise lose their powers Therefore the company in bankruptcy is controlled by thebankruptcy administrator Bankruptcy administrator is responsible for bankruptcy procedure hecontrols uses and possess assets and funds of the enterprise in bankruptcy administrator ensuressecurity of assets guide commercial activity secure creditorsrsquo rights execute bankruptcy proceedings ofthe enterprise in bankruptcy and etc


Commencement of restructuring proceedings determines that the management bodies of the enterprisewithin their competence defined in the founding documents of the enterprise and other documentsregulating the activities of the enterprise in compliance with the restructuring plan manage use anddispose of all the assets owned or held in trust by the enterprise and manage the activities of theenterprise The activities of the Management bodies of an enterprise in the course of restructuring aresupervised by the restructuring administrator appointed by the court However the restructuringadministrator does not take over the functions and rights of the management bodies of the enterprise



The commencement of the bankruptcy proceedings is considered the date when ruling of the court toinitiate bankruptcy proceedings enters into force Commencement of bankruptcy process causes thatmanagement bodies of the enterprise loose their powers The bankruptcy administrator may announce thecurrent agreements of the enterprise to be terminated or continue some economic and commercialactivities of the enterprise only provided that they reduce the losses of creditors incurred by reason ofthe bankruptcy Meanwhile the meeting of creditors may suspend or terminate the economic andcommercial activities of the company Thus economic activity of the company may be restricted by thebankruptcy administrator or the meeting of creditor or just because of the business logic As a resultthere is little or no interest to engage in economic activities with a company which is insolvent or facesfinancial difficulties Thus the ability to be financed is very much restricted The risk of financing thecompany in bankruptcy or in restructuring and engaging in economic and commercial activity with suchan enterprise is risky and shall be well considered by the creditor because repayment of itrsquos obligationmay not be possible at all


It is more likely to receive funding for the company under restructuring because the company is

214

continuing itrsquos activity and acting under a plan how to avoid financial difficulties Funding possibility ofthe company under restructuring may differ depending in what stage of restructuring the company is inTherefore restructuring of the company is divided into two stages

1) Period from the date of initiation of enterprise restructuring proceedings until the date of approval ofthe restructuring plan (drafting of restructuring plan)

2) Period after the date of approval of the restructuring plan

From the date of enterprise restructuring proceedings initiation until the approval of restructuring plan(drafting of restructuring plan) certain restrictions shall be applied This results in that the possibility toreceive funding for the company is more complicated

It is prohibited

minus to sell the enterprise or a part thereof its long-term assets or property rights

minus to transfer the enterprise or a part thereof its long-term assets or property rights into the ownership ofother persons or to allow them to use the assets of the enterprise without remuneration

minus to grant guarantees provide surety pledge or secure the discharge of obligations of other persons inany other way

The approval by the court of the restructuring plan causes that the above mentioned restrictions are notvalid anymore and that the liquidity of the company increases Therefore the possibility to receivefunding also increases Any kind of funding during this stage may be provided for the company howeverthe decision of management bodies to accept the funding should not violate the restructuring plan of thecompany


There is no special procedure established for the DIP funding The procedures established in the part 2of chapter IV shall be applied



The bankruptcy administrator shall within three working days from the entry into force of the courtruling to initiate bankruptcy proceedings against the enterprise notify the employees of the enterprise inwriting of the intended termination of the employment contracts and terminate the employment contractswith them after 15 working days from such notification Upon termination of the employment contractthe dismissed employee shall be paid a severance payment in the amount of his two average monthlysalaries The number of employees according to positions who are to be recruited under fixed-termagreements for work during the enterprises bankruptcy process shall be determined by the meeting ofcreditors The list of such employees shall be drawn up by the administrator

Under the procedure established in the Enterprise Bankruptcy Law employees of the company areentitled to initiate bankruptcy of the company (also refer to the parts 4 and 6 of chapter II)

Settlement with the employee to be dismissed shall be effected in accordance with the procedure laiddown in the part 1 of chapter I

215


Restructuring of the enterprise is a procedure whereby economic difficulties faced by the company shallbe overcome Therefore it may be necessary to dismiss certain amount of employees from the companyin order to avoid economic activity causing losses to the company and itrsquos creditors In the Law onRestructuring special provisions regarding employment relationship after the initiation of the enterpriserestructuring are not established Thus when an employee is dismissed due to the restructuring of anenterprise regular laws regulating employment relationship (ie the Labour Code) shall be appliedAccording to the Lithuanian Labour Code an employer shall be entitled to terminate an employmentcontract only for valid reasons by giving a written notice to the employee two months in advanceRestructuring of the company shall be considered as a valid reason When an employment agreement isterminated due to enterprise restructuring a severance pay shall be paid to the employee The amount ofseverance pay varies from one month to six month of employeelsquos average salary Amount of severancepay depends on for how long the employee has worked in the company

Special provisions regarding dismissal of pregnant women and employees raising children (childrenunder 3 years) shall be applied



The Enterprise Bankruptcy Law establishes that if within 30 days from the entry into force of the rulingto initiate bankruptcy proceedings the administrator notifies the persons concerned that he will notcontinue to execute the contracts which have been entered into by the enterprise and which period ofvalidity has not yet expired the aforementioned contracts (including lease and loan for use contracts)shall be deemed to have expired Where the management bodies of the enterprise have transferred to thebankruptcy administrator not all the data about the contracts entered into by the enterprise theobligations assumed and documents relating to the contracts entered into by the enterprise the time limitfor notifying the persons concerned about the non-execution of such contracts shall be calculated as ofthe date of receipt of the data about these contracts or obligations and documents This special provisionwhereby agreements engaged by the company may be terminated is exception of the pacta sunt servandaprinciple established in the Civil Code of the Republic of Lithuania however it shall not be consideredas such which exempt the company in bankruptcy from the liability arising as a consequence arisingfrom the termination of the agreements

However business logic and practice as well as interests of creditors suppose that execution ofundertaken contracts may be beneficial for the company and creditors Therefore it is established in theEnterprise Bankruptcy Law that the enterprise shall be entitled to engage in economic and commercialactivities provided they reduce losses of creditors incurred by reason of bankruptcy and use the incomereceived from such activities to cover the expenses related to these activities (also refer to part 2 ofchapter IV)


Please refer to the part 2 of chapter IV



216

Claim is to be considered a creditorrsquos material interest to require a debtor to discharge its obligations tothe creditor or a person indicated by the creditor

The creditor shall identify the amount and type of the claim the fact whether claim is secured or notalso information regarding whether period execution has expired or not documents substantiating theclaim should also be provided

The claim for initiation of the Bankruptcy process should be filed to the county court of the registrationaddress of the debtor

Claims of creditors that are to participate in the bankruptcy proceedings have to be filed with the court(through the bankruptcy administrator) within the terms indicated by the court as listed below



Claims of creditors in the enterprise bankruptcy proceedings are submitted to the court within a perioddetermined by the court that starts from the date of entry into force of the court ruling on initiation of theenterprise bankruptcy proceedings The period cannot exceed 45 calendar days after the list of creditorsand their claims is submitted to the court by the bankruptcy administrator Such claims may be adjustedif during the bankruptcy proceedings new and unknown circumstances (unknown before confirmation ofthe claims by court) appear and shall be confirmed by a court ruling prior to adoption by the court of aruling on end of the company

Subjects which have engaged in economic activities with the company are entitled to submit theirclaims after the adoption of creditorslsquo claims

The period established to submit creditorslsquo claims is not resolutely-time limited In the EnterpriseBankruptcy Law it is established that court shall have the right to accept for confirmation claims ofcreditors which have been submitted in breach of the time limits specified above provided that itrecognises the reasons for missing the time limits as important The laws do not establish what reasonsshall be considered as important Therefore it is the courtlsquos decisions to decide upon renewal of thetime period to submit the creditorlsquos claim


Claims of the creditors in enterprise restructuring proceedings have to be submitted to the court withinperiod of time determined by the court from the date of entry into force of the court ruling on initiation ofenterprise restructuring proceedings the period is at least 30 calendar days but not longer than 45calendar days Claims may be adjusted if during restructuring proceedings new and unknowncircumstances appear and such amended claims shall be confirmed by a court ruling prior to adoption bythe court of a ruling on the termination of or a decision on the closure of enterprise restructuringproceedings

Subjects which have engaged into economic activity with the company are entitled to submit theirclaims after the adoption of creditorslsquo claims (also refer to the part 1 of chapter I)

The period established to submit a creditorslsquo claims is not resolutely-time limited The court shall havethe right to accept creditorsrsquo claims which have been submitted in breach of the time limits specifiedabove provided that it recognises the reasons for missing the time limits as important The laws do notestablish what reasons shall be considered as important therefore it is a courtlsquos decisions to decideupon renewal of time period to submit a creditorlsquos claim

217


For the ranking of claims please refer to the part 1 of chapter I

Are there other complex issues arising by virtue if the insolvency for example an insolvency officerprescribed method for claims filing

Insolvency administrator is entitled to propose the agenda of the meeting of creditors he also defineswhich documents shall be submitted in order to substantiate a creditorrsquos claim The administrator maycontest the claims submitted by creditors in the court hearing the bankruptcy case



In the Enterprise Bankruptcy Law it is established that where a petition for initiation of restructuringproceedings is received during the examination of the petition for initiation of bankruptcy proceedingsand the court ruling to initiate bankruptcy proceedings has not yet been adopted the examination of thepetition for initiation of bankruptcy proceedings shall be postponed until the court ruling to initiaterestructuring proceedings or to refuse to initiate restructuring proceedings is adopted If the court adoptsa ruling to initiate restructuring proceedings the court shall refuse to initiate bankruptcy proceedings ofthe enterprise Thus this regulation may be considered as a process having the features of a cram-downprocedure Nevertheless the Law on Restructuring provides that when in the course of examination thecourt makes a reasoned conclusion that the enterprise is insolvent and where there are other conditionsto initiate bankruptcy proceedings as specified in the Enterprise Bankruptcy Law a petition on initiationof the bankruptcy proceedings shall be filed with the court in accordance with the procedure establishedby the Lithuanian Enterprise Bankruptcy Law

Therefore having the features of a cram-down procedure established in the Enterprise Bankruptcy Lawdoes not prevent the company from going into bankruptcy proceedings when clear conditions forbankruptcy of the enterprise exist In uncertain cases it shall be under the competence of the court todecide whether the possibility that the company will overcome the financial difficulties and will be ableto repay its debt and therefore continue the restructuring proceedings exists or whether the mentionedobjectives are impossible to achieve and bankruptcy of the enterprise should be started



Liquidation of the enterprise

Upon hearing the bankruptcy case and declaring an enterprise bankrupt the court adopts a ruling to putthe enterprise into liquidation by reason of bankruptcy The court declares the enterprise bankrupt andadopts a ruling to put the enterprise into liquidation within three months from the entry into force of theruling to confirm the creditorsrsquo claims unless a ruling to conclude a peace agreement with the creditorsis adopted The court may extend the time limit only if so requested by the meeting of creditors

Upon receiving the proposal of the meeting of creditors to apply the liquidation procedure in respect ofthe enterprise earlier than within three months from the entry into force of the ruling to confirm thecreditorsrsquo claims the court shall forthwith resolve the issue of declaring the enterprise bankrupt andliquidation thereof

218

When all the bankruptcy procedures are completed and all the options for satisfactions of creditorsrsquointerests are fulfilled the court upon receiving data established in the Enterprise Bankruptcy Lawadopts a ruling to liquidate the enterprise The enterprise acquires the status of lsquoliquidatedrsquo and after fewadditional actions performed by the bankruptcy administrator shall be liquidated

Other means whereby bankruptcy proceedings are terminated

The liquidation of the company is not the single option to conclude bankruptcy proceedings Bankruptcyproceedings of an enterprise may be concluded also on the following bases

minus all creditors waive their claims and the court adopts a ruling to accept the waivers

minus the enterprise in bankruptcy settles with all the creditors (creditor) and the administrator submits tothe court documents in proof thereof

minus a peace agreement with the creditors is concluded and the court approves it

Whereas termination of the bankruptcy proceedings determines that the company is not insolventanymore there is no basis for implementing of exemptions established in the Enterprise BankruptcyLaw which are related to the companyrsquos ability to execute undertaken obligations Therefore from themoment of termination of the enterprise bankruptcy proceedings all taxes and compulsory contributionsas well as interest and default interest shall be calculated from the entry into force of the court ruling toterminate the bankruptcy proceedings


Implementation of restructuring proceedings

Upon implementation of the restructuring plan the management body of the enterprise and therestructuring administrator shall within 10 working days from the day of performance of the lastpayment to the creditors as set out in the restructuring plan prepare a statement on the implementationof the restructuring plan The statement shall be signed by the management body of the enterprise therestructuring administrator authorized persons of the meeting of participants (shareholders) of theenterprise the owner thereof and the chairman of the meeting of creditors

The Restructuring administrator shall submit this statement to the court not later than within threeworking days from signing thereof

Upon receiving the statement on implementation of the restructuring plan the court shall adopt adecision to approve the submitted statement on implementation of the restructuring plan and close theenterprise restructuring proceedings

Termination of enterprise restructuring proceedings

The court shall terminate enterprise restructuring proceedings when

minus the restructuring plan is not submitted within the set time limits

minus all creditors waive their claims and the court approves their waiver

minus the enterprise under restructuring has satisfied the claims of all creditors before the time limit set inthe restructuring plan and the restructuring administrator has submitted the evidence thereof to the court

219

minus the restructuring administrator or the meeting of creditors submit to the court evidence of failure toimplement or improper implementation of the restructuring plan

minus upon expiry of the time limit for the implementation of the Restructuring plan a statement on theimplementation of the plan is not submitted

Upon coming into effect of the court ruling on the termination of the enterprise restructuring proceedingson the grounds specified in the above points 1 4 or 5 and where there are other conditions to initiatebankruptcy proceedings as specified in the Enterprise Bankruptcy Law a petition on the initiation ofbankruptcy proceedings must be filed with the court in accordance with the procedure laid down by theEnterprise Bankruptcy Law

According to the Law on Restructuring if during the implementation of the restructuring plan legalgrounds to initiate bankruptcy proceedings appear and the court receives an application to initiatebankruptcy proceedings of the enterprise the court shall adopt a ruling to terminate the restructuringproceedings and initiate bankruptcy proceedings as specified in the Enterprise Bankruptcy Law



The bellow is provided data from the Lithuanian Department of Statistics about the satisfaction ofcreditorsrsquo claims in bankruptcy proceedings during the period 1993 ndash 2011

minus 191 of creditors claims secured by mortgage or pledge were satisfied

minus 30 of banksrsquo claims were satisfied

minus 537 of employees claims were satisfied (including funds of the Guarantee Fund)

minus 101 of state tax inspections claims were satisfied

minus 86 of State social insurance fund management board claims were satisfied

minus 62 of other creditorsrsquo claims were satisfied

In total 104 of all creditors claims were satisfied


There is no data provided regarding satisfaction of creditorsrsquo claims in restructuring proceedings



Regarding non-formal procedures of the company bankruptcy and restructuring please refer to the part 2of chapter II



220

Extrajudicial bankruptcy proceedings

Extrajudicial bankruptcy proceedings may be applied provided that no action has been brought in courtin which property claims including claims relating to employment relations have been entered againstthe enterprise also if no recovery is made from the enterprise under the writs of execution issued bycourts or other institutions The resolution to carry out extrajudicial bankruptcy procedures may beadopted by the meeting of creditors if the resolution is voted in favour of in open voting by the creditorswhose claims in terms of value account for at least 34 of the amount of all the liabilities of theenterprise on the day of adoption of the resolution including those which have not yet matured

Extrajudicial bankruptcy proceedings shall be carried out in compliance with the Enterprise BankruptcyLaw The issues assigned to the competence of the court shall be considered and decided upon by themeeting of creditors Only the creditors may initiate extrajudicial bankruptcy proceedings

Extrajudicial bankruptcy process last for 1 year on average

Simplified bankruptcy proceedings

When during the examination of the enterprise bankruptcy case the court makes a conclusion that theenterprise has no assets or that its assets are insufficient to cover the legal and administrative expensesof bankruptcy the court may adopt a ruling to apply the simplified bankruptcy proceeding Simplifiedbankruptcy proceeding may not last longer than one year from the day of entry into force of the ruling toapply the simplified bankruptcy proceeding Proceedings of liquidation of the company because ofbankruptcy shall be applied during the simplified bankruptcy proceeding The issues concerning the saleof assets assigned to the competence of the meeting of creditors shall be resolved by the court

Simplified bankruptcy process lasts for 1 year on average


Simplified restructuring proceedings

The restructuring proceedings of an enterprise may be initiated as simplified restructuring proceedingswhen the draft of restructuring plan in accordance with the Law on Restructuring is drawn up andapproved by the 23 majority of creditors prior to the filing with the court of a petition to initiate theenterprise restructuring proceedings The court shall not later than within one month adopt a ruling toinitiate the enterprise restructuring proceedings approve the restructuring plan and appoint arestructuring administrator or to refuse to initiate the enterprise restructuring proceedings The durationof restructuring of the enterprise shall be established in the restructuring plan Restructuring may not lastlonger than 4 years The management body of the enterprise or the restructuring administrator may by adecision of the meeting of creditors file a petition with the court for extension of the enterpriserestructuring period The court or a judge may extend the duration of the restructuring period but for nolonger than for one year



On the International level the issues concerning insolvency proceedings are regulated by a number ofmultilateral and bilateral legal assistance agreements7 however these agreements mostly regulate the

221

aspects of jurisdictions and recognition of certain documents but do not provide for material provisionsregarding implementation of insolvency proceedings Therefore in case of an international bankruptcylegal assistance agreements and provisions of the Civil Code of the Republic of Lithuania regardingapplicable law and the Lithuanian Code of Civil Procedure regarding jurisdiction shall be applied

On the European Union level sustentative importance is possessed by the Council Regulation (EC) No13462000 of 29 of June 2000 Also the decisions of the European Union Court of Justice regardingapplication of the Council Regulation (EC) No 13462000 should not be violated in any form


On the European Union level the Council Regulation No 13462000 (Regulation)

has significant importance This Regulation is applied in all Member States except for Denmark

The Regulation establishes provisions regarding jurisdiction applicable law recognition andenforceability of judgments

If the centre of the main interests of a company within the meaning of recitals 12 and 13 of the preambleto Regulation 13462000 is in a EU member state (except for Denmark) then the insolvencyproceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

In cases of international bankruptcy when the Council Regulation No 13462000 shall not be appliedprovisions of the bilateral and multilateral agreements shall come into force When any of the abovementioned legal acts cannot be applied provisions of the Code of the Civil Procedure of the Republic ofLithuania (hereinafter ndash the Code of Civil Procedure) and the Civil Code of the Republic of Lithuaniacome into effect

In the Code of Civil Procedure it is established that in cases of absence of an international agreementdecisions of foreign courts are recognized unless

minus the decision is not valid in accordance with the laws of the country where the decision was adopted

minus the case is attributable only to the competence of the courts of the Republic of Lithuania or other thirdcountry courts

minus the party which did not participate in hearing of the case had not been properly informed about theinitiation of a civil (including bankruptcy) case and during the process its possibility to defend its casewas violated

minus the decisions the recognition whereof is asked for is not in compliance with the decisions of aLithuanian court that took place between the same parties regarding the same matter

minus the decision the recognition whereof is asked for is not in compliance with the public orderestablished in the Constitution of the Republic of Lithuania

222

Malaysia

ZUL RAFIQUE amp partners partner Mariette Peters

wwwzulrafiquecommy email MariettePeterszulrafiquecommy tel +60 3 6209 8228



Depends on the security given ndash for example

a) charge ndash enforcement of a charge

b) lienmortgagepledge ndash enforcement generally subject to the creditor having possession of the asset


Yes The transactions may be void or voidable for undue preference and fraud


If in the course of the winding up of a company a director or an officer of the company who hasmisapplied or liable for any money or property or guilty of any misfeasance or breach of trust or duty inrelation to the company that director if found guilty may be imprisoned or a monetary penalty imposedon him

2 Taking action


If the company is insolvent the liquidatorreceiver manager appointed to realize the assets and pay ofthe creditors This may lead to winding up of the company Alternatively the company its creditors andmembers may approve a scheme to address the concerns of all parties The company and its membersand creditors may enter into such compromise or arrangement (whether or not for persons of or inconnection with a scheme or reconstruction) The Court at such application for a scheme additionallymake an order to restrain any proceedings in any action or proceedings against the company

If the business of the company has been carried out without proper records to defraud the creditors ofthe company and investigations confirmed that any director officers or persons who was knowinglybeen a party to carrying on the business in such manner the Court may at the application of the liquidatoror a creditor make the persons personally liable for all and any debts Additionally the persons may beliable to pay monetary penalties or be imprisoned


No informal procedures set out in our company laws

223


No procedure benefits either The company is in distress unless the creditor is secured he is likely totake a hair-cut for the loans or credits extended and insofar as the company unless the monies and assetsmay be freed up there is only winding up


At the company cannot pay its debts and a company is deemed unable to pay debts if

(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding fivehundred ringgit then due has served on the company by leaving at the registered office a demand underhis hand or under the hand of his agent thereunto lawfully authorized requiring the company to pay thesum so due and the company has for three weeks thereafter neglected to pay the sum or to secure orcompound for it to the reasonable satisfaction of the creditor

(b) execution or other process issued on a judgment decree or order of any court in favour of a creditorof the company is returned unsatisfied in whole or in part or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts and indetermining whether a company is unable to pay its debts the Court shall take into account the contingentand prospective liabilities of the company


Voluntary winding is divided into 2 categories

1) Membersrsquo voluntary winding up is the liquidation of a solvent company where the directors haveformed an opinion that the company will be able to pay its debts in full within the period of 12 monthsafter the commencement of winding up as stated under section 257 of the CA 1965 and

2) Creditorsrsquo voluntary winding up is a liquidation of an insolvent company where the directors make adeclaration stating that the company cannot by reason of its debts and liabilities continue its businessA meeting between the company and its creditors must be summoned within 1 month from the date of thedeclaration

A scheme of arrangement may be made by the company or any or its creditors or members to the Court ameeting will be held to an order of the Court to secure a resolution made by three fourths in value of thecreditors or classes of creditors or members or class of members agreeing to any compromise andorarrangement as approvedsanctioned by the Court


Winding up by the Court

(i) The company

(ii) Any creditor including a contingent or prospective creditor of the company

(iii) A contributory or any person who is the personal representative of a deceased contributory or thetrustee in bankruptcy or the official assignee of the estate of a bankrupt contributory

(iv) The liquidator

224

(v) The Minister pursuant to Section 205 or on the grounds specified in Section 218 (1)(d) of theCompanies Act

(vi) The Bank Negara Malaysia in the case of a company which is a licensed institution under theFinancial Services Act or under the Insurance Act 1996

(vii) The Registrar on the ground specified in Section 218(1)(m) or (n) of the Companies Act

Voluntary Winding up

(i) The shareholders ndash where a declaration of solvency (that the company will be able to pay its debts infull within 12 months of the commencement of winding up) has been made and lodged pursuant toSection 257 of the Companies Act

(ii) The creditors ndash where no declaration of solvency has been made and lodged (when a company isinsolvent the Companies Act gives the control of a creditorsrsquo voluntary winding up in the hands of thecreditors)


(i) The company

(ii) The creditors

(iii) Its members

(iv) Liquidator


The Court plays a supervisory role in a creditors winding up and scheme of arrangement


Much will depend on whether the winding up proceedings are contested or not


Other than making the court applications there would be notices to be sent to creditors of a creditorsmeeting as well as advertisements placed in newspapers circulating throughout Malaysia to giveopportunity to creditors to attend the creditors meeting and submit their respective claims


Under the scheme of arrangement the company can make an application to restrain further proceedingsprior to the winding up where a compromise or arrangement has been proposed The restrain willallow the company to reconcile its financial undertaking and plan for a reconstruction or repayment ofits debts to the creditors


Yes To a certain extent a ldquoscheme of arrangementrdquo under Section 176 of the Companies Act inMalaysia is akin to what is called ldquodebtor in possessionrdquo in the United States (DIP) which comes undera debt restructuring mechanism of Chapter 11 of the US Bankruptcy Code Unlike liquidation which

225

involves a liquidator taking over the company in a Chapter 11 scenario the control of the debtorcompany remains with its management through the concept of DIP As a safeguard the debtor companywill be subjected to oversight by the bankruptcy court and the trustee A scheme of arrangement like theDIP is an alternative way for creditors to recover their debts without the need of winding up the debtorcompany It is a useful tool to reorganize the company as it provides for a statutory form (by way of acourt order) by which affected creditorsshareholders may agree to a scheme which if approved by thecourt will bind any dissenting creditorsshareholders If a company is subject to a scheme ofarrangement the management usually retains control although its management will be bound by thescheme and court sanction


No


No

3 Creditor issues


All Secured debts are to be paid in priority to all unsecured debts in a winding up In order of prioritythe unsecured creditors are last to be paid and may only recoup the monies outstanding after payment tothe secured creditors


A secured creditor has a few options

a) Subject to the terms of a chargepledgemortgage he may selldisposerealize his security to satisfythe debt which is due to him if the proceeds are insufficient to cover the amount due he may commencelegal proceedings for any deficiency

b) He may appoint a receiver and manager pursuant to the terms of a debenturesecurity documentationto secure and enforce its rights


Subject to the terms of the security documents secured creditors may the right to set off such monies andmutual claims in the possession of the creditors




No unless any affiliated company has given a guarantee or a security for the benefit of the companyEach company is a separate legal entity


226

At the creditors meeting a committee of inspections may be appointed at the discretion of the creditorsthat may or may not consist of creditors The committee has a role is to supervise the liquidator



In a winding up scenario the control of all the property of the company vests in the liquidator orprovisional liquidator

In scheme of arrangement commonly the management of the company


In a winding up - shareholdersrsquo advance and existing creditors

In a liquidation ndash no financing available all assets of company realized


No DIP funding equivalent pursuant to Malaysian laws even under its the equivalent scheme ofarrangements the company is funded by shareholdersrsquo advance and existing creditors


In a voluntary winding up it was held in the English Case of Midland Counties District Bank v Attwood[1905] 1 Ch 357 that a resolution for the voluntary winding up of a limited company did not operate as anotice of discharge to the employees of the company This is however depending on the facts and timingof each particular case If the employment were conditional upon the continued existence of a companythen the employment would cease automatically when it is wound up

Pursuant to Malaysian Companies Act 1965 in a winding up these shall be paid in priority of all otherunsecured debts

(a) all wages or salary (whether or not earned wholly or in part by way of commission) including anyamount payable by way of allowance or reimbursement under any contract of employment or award oragreement regulating conditions of employment of any employee not exceeding one thousand fivehundred ringgit or such other amount as may be prescribed from time to time whether for time orpiecework in respect of services rendered by him to the company within a period of four months beforethe commencement of the winding up

(b) all amounts due in respect of workers compensation under any written law relating to workerscompensation accrued before the commencement of the winding up

(c) all remuneration payable to any employee in respect of vacation leave or in the case of his death toany other person in his right accrued in respect of any period before the commencement of the windingup

(d) all amounts due in respect of contributions payable during the twelve months next before thecommencement of the winding up by the company as the employer of any person under any written lawrelating to employees superannuation or provident funds or under any scheme of superannuation or

227

retirement benefit which is an approved scheme under the federal law relating to income tax


As from the commencement of winding up the company must cease to carry on its business except in sofar as is in the opinion of the liquidator required for the beneficial winding up thereof The corporatestate and corporate powers of the company shall continue until it is dissolved Any transfer mortgagedelivery of goods payment execution or other act relating to property made or done by or against acompany shall be void or voidable (Section 293(1) Companies Act 1965) Any disposition of thecompanyrsquos property made after the commencement of the winding up will be void (S 223 CompaniesAct 1965) Any transfer of shares unless made to or with the sanction of the liquidator and anyalteration in the status of the shareholders made after the commencement of the winding up shall be void(Section 256(2) Companies Act 1965)



In a winding up by the Court every creditor shall prove his debt unless the Judge in any particularwinding up shall give directions that any creditors or class of creditors shall be admitted without proof

In a scheme of arrangement the every creditors are similarly required to prove his debt


The declaration proving debt must be filed by the creditor within 3 months after the winding up order ismade As the proof of debt is filed electronically the documents substantiating the claim specified in theproof of debt must be sent to the Official Receiver within 14 days from the date of submission of theproof of debt


In a winding up the following shall be paid in priority to all other unsecured debts

i Costs and expenses of the winding up

ii All wages or salary

iii All amounts due in respect of workerrsquos compensation (relating to workerrsquos compensation accruedbefore the commencement of winding up)

iv All remuneration payable to any employee in respect of vacation leave v All amounts due in respectof contributions payable during the 12 months before the commencement of the winding up as theemployer relating to employees superannuation or provident funds and

vi Amount of all federal tax (Section 292 of Companies Act 1965)


No

228



Cram-down Procedure in the United States is similar to the scheme of arrangement under Section 176 ofthe Companies Act (explained above)


The procedure of scheme of arrangement involves the following

(i) The company proposing the scheme of arrangement must seek a court order convening creditor andorshareholders meeting in order to vote on the proposed scheme

(ii) A meeting or meetings are convened at which the attendees are separated into classes and will berequire to vote on the proposed scheme of arrangement At least 50 in number constituting 75 invalue of each relevant class of creditors must vote in favour of the scheme for it to proceed to sanction

(iii) A class must not be confined to those persons whose rights are not so dissimilar as to make itimpossible for them to consult with a view to their common interest

(iv) Once the scheme of arrangement has been approved by the requisite majority of each class thecompany will apply to the court and request that it sanction the scheme of arrangement

(v) The scheme of arrangement will become effective upon delivery of the relevant sanction order by thecourt to the Companies Commission of Malaysia and will bind all creditors of each relevant class


In the ranking of creditors to be paid unsecured creditors are very low This means that there is a strongpossibility that there are not enough funds from the liquidation to satisfy the debts owed to thosecreditors



No


No



No Only Malaysian legislation applies

229


Where a company had borrowed in foreign currencies and all financing documents and securityagreements are subject to foreign laws then the company will have to comply and lenderscreditorswould have to take actions pursuant to those foreign laws to recover its debt The enforcement of theorder in Malaysia are further subject to various laws including whether the foreign sovereign andMalaysia has a reciprocal arrangement

230

Mauritius

Raffeek Sham Principal of LI SHAM amp SEEAM

raffeekshamadvisersmu tel +230 211 3399

Overview

bull The Insolvency Act 2009 (ldquothe Actrdquo) is the main enactment governing insolvency proceedings andrelated matters in Mauritius

bull The Act came into effect on 1 June 2009 and applies to both individual and corporate insolventdebtors insolvency of banks financial institutions and insurance companies is however catered forunder separate enactments namely the Banking Act 2004 and the Insurance Act 2007

bull The Bankruptcy Division of the Supreme Court retains jurisdiction to deal with all insolvency mattersexcept for Cross Border Insolvency matters (Part VI of the Act) which are to be dealt with by theCommercial Division of the Supreme Court

bull The other relevant legislative texts are the Companies Act 2001 (ldquoCA 2001rdquo) and our French-inspiredCode Civil Mauricien (ldquoCCMrdquo) Code de Commerce (ldquoCDCrdquo) and the Code de Procedure Civile(ldquoCDPCrdquo)

bull Except where otherwise stated all listed sections below are references to the Act



The following options are available-

(i) mortgage

(ii) fixed or floating charge

(iii) ldquogagerdquo eg vehicles and equipment leasing other forms of privileged debts in favour of approvedinstitutions (banks and lending institutions)

(iv) right of set-off provided under section 309

(v) deposit of a share or debenture certificate

(vi) pledge of shares or debentures

(vii) charge on a ship or aircraft

(viii) attachment on the proceeds to be paid by the Sugar Syndicate and

(ix) lien or retention of title

231


Yes ndash the following instances may be noted-

(a) Voidable preference

A transaction undertaken by the debtor at the time it was unable to pay its debts and which would enableanother person to receive more in satisfaction of that debt than would have been the case in aliquidation Such a transaction may be set aside by the Court on the application of the Official Receiveror a liquidator where it was made within 2 years immediately before commencement of the winding up

(b) Voidable charge

A charge over any property or undertaking of a debtor may be set aside where (i) the charge was givenwithin 2 years immediately before the commencement of the winding up and (ii) immediately after thecharge was given the debtor was unable to pay its due debts

(c) Intention to defraud a creditor

A disposal of property made by a debtor within 5 years immediately before the commencement of thewinding up of the debtor with intent to defraud a creditor may likewise be set aside (except for apurchaser in good faith not having at the time of the alienation notice of the intention to defraud anycreditor)

(d) Voidable gift

A gift by a debtor to another person may be set aside where (i) the debtor made the gift within 2 yearsimmediately before the commencement of the winding up and (ii) the debtor was unable to pay his or itsdue debts immediately after making the gift

(e) Transactions with directors

A transaction entered into by the company in which a director is interested may be avoided by thecompany at any time before the expiration of 6 months after the transaction is disclosed (except wherethe company has received fair value or the transaction was undertaken at armrsquos length or the constitutionprovides otherwise)

(f) Inadequate or excessive consideration

Related partiesrsquo transactions undertaken by the debtor during the period of 2 years before thecommencement of winding up may be the subject of challenge where the Official Receiver or Liquidatorconsider such transactions have been conducted for inadequate or excessive consideration Transactionstargeted include acquisition or disposal of a business or property acquisition or provision of servicesprovision of a guarantee or issue of shares for benefit of the related party

(g) Other matters

These may include failure to comply with prescribed formalities eg failure to insert in instrument ordeed the exact prescribed wording of indebtedness or failure to obtain any pre-requisite governmentapproval(s) for certain transactions could render security instruments defective


232

(a) Section 162 CA 2001

A director who believes that the company is unable to pay its debts as they fall due must call a meetingof the Board to consider whether a liquidator or an administrator should be appointed Failure to do somay render the director liable for the loss suffered by creditors where the company (i) was unable topay its debts at the time of such failure and (ii) was subsequently put into liquidation on account ofhaving continued trading while in distress

(b) Other liabilities

(i) The directors including a past director may be liable to criminal prosecutions where during the 12months preceding the winding up (or any time thereafter) they have engaged in any conduct involvingfraud dishonesty misrepresentation making false statement or other prohibited dealings

(ii) Where a director of a company in receivership fails to settle dues in respect of PAYE NationalPensions Fund Training Levy Workfare Programme Fund on the due date that person shall bepersonally liable for the total amount due including all penalties charges and interests thereon

2 Taking action


(a) Administration

The Administration process is a short term mechanism aiming to keep the company or as much aspossible of its business in existence or should that not be possible for a better return to be achieved forits creditors and shareholders than would result from the immediate winding up of the company

This process basically involves choosing within a set time-frame one of three options ie whether itwould be in the creditorsrsquo interest for-

(i) the company to execute a deed of company arrangement (ldquoDOCArdquo)

(ii) the administration to end or

(iii) a liquidator to be appointed

(b) Winding up by the Court

A company may be wound-up by order of the Court a petition for winding up may be presented by thecompany a shareholder a contributory a creditor a liquidator the Director of Insolvency Service or theFinancial Services Commission

(c) Members winding up

A membersrsquo winding up may only be effected where the company is solvent the liquidator is appointedby special resolution] A company may otherwise (section 137) be wound up by ordinary resolution ofits members where the period if any fixed for its duration by its constitution expires or the event ifany occurs on the occurrence of which the constitution provides that the company is to be dissolved

(d) Creditorsrsquo winding up

233

Where the company is insolvent the directors may upon lodging the statutory declaration of insolvencyappoint a provisional liquidator and should convene meetings of members and shareholders forconfirmation or replacement of the provisional liquidator

(e) Appointment of Receiver

A secured creditor may pursuant to the terms of the charge instrument appoints a receiver over thecharged assets of the debtor company ndash the main task of the receiver is to realize or sell the chargedassets and (subject to any preferential claims) apply the net proceeds in satisfaction of the chargeersquosclaims


(a) In January 2013 the Companies Division issued the Out-of-Court Guidelines for Restructuring(endorsed by the Central Bank) which outline the following rescue avenues-

(i) bilateral work-out involving the debtor and a creditor leading to the rescheduling of paymentsandor debt forgiveness

(ii) multilateral negotiations between the debtor and its major creditors leading to debtrescheduling debt forgiveness or the granting of other incentives as agreed by the parties

The Guidelines emphasize the need for a breathing period (Standstill Period) to allow for a viable planto be put in place while existing credit lines are maintained creditors do not take any enforcementaction and debtor does not act in manner which adversely affect creditors

(b) Consideration may also be given to any Government schemes (eg Forex Loan Facility by CentralBank ldquoIndustrial Sick Unitsrdquo etc) which may exist to protect and support employment in a particularindustry sector or category (SMEs)


(a) The formal procedures attempt to strike a fair balance in conferring some form of ldquoequalityrdquo oftreatment to the three main stakeholders

(i) government - highest amount due for any one of four years preceding winding up being rankedamong priority claims provided such government debts have been inscribed on an annual basis

(ii) employees - one monthrsquos wages (capped at Rs30000 approx USD1000 per employee) priorto winding up likewise among priority claims and

(iii) lenders - fixed and floating charges (registered for more than three years) ranking pari passuwith remaining claims of employees but before other classes of creditors (including remaininggovernment claims under (i) above)

(b) The informal processes may be considered to be creditors-led and should provide scope for theparties to come up with flexible and pro-business solutions (often with government active support orincentive)


(a) Solvency test

234

Where the company does not satisfy the test (assets greater than sum of its liabilities and stated capital)and is unable to pay debts in normal course of business the directors must act (section 162 CA 2001) toconsider administration or liquidation or continue operations

(b) Inability to pay its debts

A company is presumed to be unable to pay its debts as they become due in the ordinary course ofbusiness where ndash

(i) the company has failed to comply with a statutory demand

(ii) execution issued against it in respect of a judgment debt has been returned unsatisfied

(iii) a person entitled to a charge over all or substantially all of its property has appointed areceiver under the instrument creating the charge or

(iv) a compromise between the company and its creditors (CA 2001) has not been approved

(c) Other grounds for winding up

A petition for winding up may be presented where (inter alia) ndash

(i) the directors have acted for their own interests against shareholdersrsquo interests or in a mannerunfair or unjust to the shareholders

(ii) the directors or managers have acted to conceal or remove assets of the company outside thejurisdiction with intent to defeat creditors

(iii) an inspector (appointed under the CA 2001) reports that it is in the interests of the public or ofthe shareholders or creditors that the company should be wound up

(iv) a bank has carried on business in Mauritius in contravention of the Banking Act 2004

(v) an insurance company has carried on business in Mauritius in contravention of the InsuranceAct or the Financial Services Act 2007

(vi) a licensee of the Financial Services Commission has carried on business in contravention ofthe Financial Services Act 2007 or the Securities Act 2005


(a) Insolvency Practitioners (administrators managers liquidators receivers) must be registered withthe Insolvency Service

(b) They must lodge copy of their appointments and situation of office (and any subsequent changesthereof notice of their removal resignation replacement) with-

(i) the Insolvency Service

(ii) the Official Receiver

(iii) the Registrar of Companies

(c) They must-

235

(i) give public notice of their appointments in the Government Gazette and daily newspaper(s)

(ii) give public notice of meetings of members contributories and creditors

(iii) submit six-monthly statutory reports and accounts of the winding up to the Insolvency Serviceand the Official Receiver

(d) A petitioner who obtains a winding up order from the Court must lodge a copy of the order togetherwith the name and address of the Liquidator with the following-

(i) Director of Insolvency Service

(ii) Official Receiver

(iii) the secretary of the company or as the Court directs and

(iv) the liquidator


(a) Administration

(i) the company

(ii) a secured creditor having charge over wholesubstantially whole of companyrsquos property

(iii) the liquidator or a provisional liquidator

(iv) the Court or

(v) Supervisory Committee (for prescribed designated companies)

(b) Winding up by Court

(i) the company

(ii) a contributory (or heirestate of a deceased contributory)

(iii) a shareholder

(iv) a creditor including a contingent or prospective creditor of the company

(v) a liquidator

(vi) the Director of Insolvency Services or

(vii) the Financial Services Commission`

(c) Membersrsquo winding up

The directors should make the statutory declaration of solvency and shareholders pass required specialresolution appointing the liquidator


236

The directors must file the statutory declaration of insolvency appoint a provisional liquidator andconvene meetings of creditors to confirm provisional liquidator or otherwise appoint some other personas liquidator

(e) Receivership (section 183)

(i) the charge holder or

(ii) the Court


(a) The Court retains overall supervision of administrations receiverships and all forms of winding upincluding the power to control insolvency practitioners in the discharge of their duties

(b) There is general power of the Court to deal with various issues including power to consider andmake a pronouncement on any irregularity in proceedings to hear any party who may be aggrieved bythe acts of an administrator receiver or liquidator and grant such relief as the Court may considerappropriate

(c) The administrator receiver provisional liquidator or liquidator may also seek directions from theCourt Furthermore no action shall be proceeded with or against a company without the leave of Courtwhere a provisional liquidator or administrator has been appointed or a winding up order made


Depending on the size of organisations nature of operations and other factors the process may well lastfrom a few weeksmonths (straight forward cases) to several years for more complex situations (eginvolving overseas recovery of assets and litigations)


(a) Please refer also to matters listed above under Section 2 (Taking Action) sub-heading What is theprocess for filing

(b) The Insolvency Practitioners must display clearly in all correspondences notices or other documents(including every agreement or deed executed while holding office) that the company is ldquoInAdministrationrdquo ldquoIn Receivershiprdquo ldquoIn Provisional Liquidationrdquo or ldquoIn Liquidationrdquo as appropriate

(c) A secured creditor who appoints an administrator under section 215 shall give written notice of theappointment to the company as soon as practicable and in any event before the end of the next workingday


(a) Any attachment sequestration distress or execution put in force against the assets of a company afterthe commencement of a creditorsrsquo winding up shall be void

(b) After the commencement of a winding up no action or proceeding shall be proceeded with orcommenced against the company except by leave of the Court and subject to such terms as the Courtthinks appropriate

(c) A transaction or dealing by a company in administration or by a person on behalf of the companythat affects the companyrsquos property is void unless the transaction or dealing was entered into by or with

237

consent of administrator or under Court order


This process does not seem to exist in Mauritius proceedings


Insolvency proceedings are court-supervised mechanism

In high profile cases (large factories or some particular sector) the political class being sensitive toneed for preserving jobs may involve government agencies (eg Development Bank of Mauritius StateInvestment Corporation Business Parks of Mauritius Stimulus Package or other similar schemes) tointervene by providing concessionary financing rescheduling existing debts or waiving dues orpreferential claims or Minister in charge may secure work-out solutions with lenders employees andother stakeholders

3 Creditor issues


Unsecured creditors stand last in the queue for any winding up dividend

There are a few exceptions like (a) rent due six-months prior to winding-up (b) rent due for period ofoccupation during winding-up and (c) suppliers of essential services


Where permitted under the charge instrument the secured creditor may appoint a manager or receiverand manager to take possession of and realize the charged assets in satisfaction of the creditorrsquos claim


(a) Where there have been mutual credits mutual debts or other mutual dealings between the companyand another person the right of set-off is available so that only the balance of the account may be provedor payable to the Official Receiver or Liquidator as appropriate

(b) The right of set-off will not be available with respect to transactions entered into between thecompany and

(i) any party during the period of 6 months preceding the commencement of a winding up

(ii) a related party during the period of 2 years before the commencement of a winding up

unless that party or related person as the case may be proves that at the time of the transaction they didnot have reason to suspect that the debtor-company was unable to pay its debts as they became due


Related partiesrsquo transactions not undertaken at armrsquos length or in breach of the Act or other enactmentmay be subject to challenge

238


Article 1166 of CCM allows a creditor to sue the debtors of its debtor in an action to recover its dues(but this right would not be available where the debtor-company is in administration receivership orwinding up)


(a) The appointment of a committee of inspection is a usual ldquofixturerdquo in a court or voluntary winding upor an administration It is composed of representatives of the creditors and members or contributories ofthe company

(b) The main functions of the committee include the following

(i) generally monitoring the progress of the winding up

(ii) fixing the remuneration of the liquidator

(iii) authorizing the liquidator to pay any class of creditors in full

(iv) authorizing liquidator to sell or dispose property of the company

(v) sanctioning payment (or postponement thereof) of interim dividend

(vi) generally consult with the administrator liquidator or official receiver

(vii) receiving and considering reports by the administrator liquidator or official receiver



The administrator receiver manager provisional liquidator or liquidator as the case may be will havecustody and control of the company and business under the overall supervision and direction of theCourt


(a) See also under sub-heading Are there political factors coming into play under section 2 (TakingAction) above

(b) In some major insolvencies (factories with thousands employees) the lenders may grant workingcapital (ranking pari-passu with their existing debts) to sustain operations and honour order bookcommitments

(c) Quite infrequently finance may be arranged under the sanction of the Court who may imposeconditions as it deems fit


This mechanism is not known in Mauritius

239


(a) No automatic termination of employees contract

(b) AdministratorLiquidator liable for payment of wages or salary that accrue under contract ofemployment entered into before the administratorrsquosliquidatorrsquos appointment unless lawful notice givenfor termination of said contract

(c) Receiver liable for payment of wages or salary that during the receivership accrue under a contractof employment relating to the property in receivership and entered into before his appointment unlessnotice of termination is lawfully given within 14 days (or longer period granted by Court) after the dateof appointment

(d) Employeesrsquo rights and claims otherwise governed by provisions governing Preferential Claims(Fourth Schedule)


Supply of essential services (water electricity and telecoms) cannot be interrupted during insolvency onaccount of dues predating commencement of insolvency or administration

Administration

(a) The Administrator has powers of company and officers and may terminate contracts

(b) No transfer of shares or modification of rights and liabilities of shareholders

(c) No enforcement of charge without consent of administrator or the court

(d) Taking possession of leased property not allowed without consent of administrator or the court

(e) No enforcement of guarantee given by a director

(f) DOCA binding (irrespective of existing contracts) on company its officers shareholders the deedadministrator and all creditors

Liquidation

(a) Liquidator has power to determine contracts including terminating employment contracts


(c) Right of a secured creditor not affected (subject to the priority of claims) to take possession of andrealise or otherwise deal with property of the company over which that creditor has a charge

Receivership

Receiver liable for rent and any other payments becoming due under an agreement subsisting at the dateof his appointment relating to the use possession or occupation by the chargor of property inreceivership ndash the dues under such contracts will run from 14th day after appointment up to the datewhich is earliest on which use possession or occupation or receivership ends

240



(a) The proof of debt must be verified by an affidavit which shall

(i) contain a statement of account showing the particulars of the debt

(ii) specify the vouchers if any by which the same can be sustained and

(iii) state whether or not the creditor is secured whether inscription has been made or not

(b) A creditor whose proof of debt has been rejected may apply to the Court for an order modifying orreversing the decision such an application must be made within 15 working days after the creditorreceives the notice of rejection (or within such extended time that the Court allows)


(a) Every creditor shall prove his debt as soon as may be after the commencement of a winding up Inpractice creditors are invited by public notice to submit their claims by a set deadline date

(b) The Court may fix a date on or before which creditors are to prove their debts or claims after whichdate they will be excluded from the benefit of any distribution made before those debts are proved


The following order of priority applies

(1) Costs of liquidation (including fees expenses rent incurred after commencement of winding-upcosts of essential suppliers and remuneration)

(2) Amounts due and unpaid to government and its agencies (VAT income tax registration duty customsduty) during the four years preceding commencement of winding up but (a) limited to highest amount forany one of those four years and (b) provided relevant inscription has been effected

(3) Wages and salaries due to employees for one month before commencement of winding up (limited toRs30000 per employee) and any claim for lien (limited to Rs20000)

(4) Costs of compromise with creditors under section 260(c) CA 2001

(5) (a) Amount due and payable in respect of first ranking fixed and floating charges inscribed for morethan 3 years

pari passu with

(b) Payment for termination of employment under Employment Rights Act 2008 and any compensationfor unjustified dismissal which accrues or crystallises before completion of winding up

(6) Landlord special privilege any rent due and unpaid for period of 6 months precedingcommencement of winding up

(7) (a) First ranking fixed and floating charges inscribed for less than 3 years

(b) The amount payable under any inscribed charge or mortgage other than a first ranking fixed and

241

floating charge or mortgage

(8) Claims of victims of accident

(9) Other privileges securities and creditors (including costs for debtorrsquos assets and privileges forarchitects and builders)

(10) Amounts due to Government and its Agencies in relation to amounts due and unpaid for taxescharges and dues which are due and unpaid for the period not exceeding four years prior to the date ofcommencement of the winding up and which has not been paid under item (2) above

(11) All other unsecured creditors who have proved in the winding up (including judicial costs andCourt fees funeral expenses)


The peculiarities of cross border insolvency and netting in financial contracts may be noted



The objective of a cram-down procedure may be achieved where a duly approved DOCA is executedunder the administration regime


(a) Administration - comes to an end where

(i) the creditors so resolve

(ii) DOCA is executed

(iii) a liquidator is appointed

(iv) time-limit for holding the watershed meeting of creditors expires

(v) the Court makes an order to that effect

(b) Voluntary winding up comes to an end where

(i) companyrsquos assets have been fully realized

(ii) any final dividend distributed

(iii) contributories rights adjusted as appropriate

(iv) any final return made to contributories

(v) account showing how winding up conducted and property realized submitted and

242

(vi) the Court makes an order to dissolve the company

(c) Receivership is concluded when

(i) the charged assets have been realized

(ii) proceeds applied in payment of charge holder (subject to any preferential claims)

(iii) submission of final report (summarizing statement of affairs conduct of receivership amountsreceived and paid any amounts owed to secured and unsecured creditors)

[The company would then return under control of directors or may be put into liquidation]


(a) Compromise with the creditors (section 254 CA 2001) for restructuring of companyrsquos debts (egcancelling all or part of the debts varying creditorsrsquo rights or debts terms) and which will be binding onthe company and all creditors if the plan is duly approved by the creditors in accordance with section256 CA 2001

(b) Scheme of arrangement (section 261 CA 2001) for reorganization of companyrsquos share capital (egdebt for equity swap) and Court may make order for arrangement to be binding on such class of personsas it may consider

(c) Amalgamation (section 244 of CA 2001) with another or more entities pursuant to which thesurviving entity takes over the liabilities debts obligations property and rights of the individualamalgamating debtor companies



Part VI of the Act provides for an effective mechanism to deal with Cross Border Insolvency (CBI)issues based on the UNCITRAL Model Law This Part VI is yet to be proclaimed to come into force


(a) Part VI and the accompanying Ninth Schedule (containing the detailed rules) are based on thefollowing principles

(i) Access of foreign representatives and creditors to courts in Mauritius

(ii) Recognition of a foreign proceeding and relief

(iii) Co-operation with foreign courts and foreign representative

(iv) Cooperation and coordination of concurrent proceedings

(v) Public policy exception

243

(b) Part VI contains reciprocity provisions in relation to recognition of foreign proceedings

(c) In the implementation and interpretation of the CBI provisions regard to be had to the following-

(i) their international origin and the need to promote uniformity in their application and theobservance of good faith

(ii) reference may be made to the Model Law and any document that relates to the Model Law andoriginates from the United Nations Commission on International Trade Law or its working groupfor the preparation of the Model Law

244

Mexico

Alfonso Villalva Partner Bufete Villalva Abogados

wwwvillalvacom email avpvillalvacom tel +52 55 5257 4994



Typically the creditors could request to the Judge in the liquidation phase of a Company to take thenecessary remedies to secure the assets such as

(i) Prohibition of payment of obligations due prior to the date of acceptance of the claim or bankruptcylawsuit

(ii) The suspension of any foreclosure proceeding against assets or rights of the company or individual

(iii) The prohibition to perform remedy actions or encumbrance of his company main assets

(iv) The seizure of assets

(v) The prohibition on transfers of assets or securities to third parties

(vi) The order to embed the individual for the sole purpose to not left his domicile without leave


No as such transaction if executed on a binding document should be fulfilled in all its terms


Directors of a company might be held liable to civil administrative actions or even to criminal liabilityin the event of fraudulent acts

If the company has not been declared insolvent by a competent court the directors will not be liable andthey shall continue the operation of a company under financial distress

2 Taking action

What formal and informal procedures are available for the company

In Mexico there are several actions available prior to a formal insolvency proceedings such asforeclosure restraining orders preliminary discovery or pre-filing motion which depends on the type ofagreement and the action could be followed civil mercantile ndashordinary or special The Bankruptcy Lawprovides for a single insolvency proceedings which consists in two main stages the conciliation stageand bankruptcy stage (and a liquidation process if assets are available)

245

It does not provide different insolvency proceedings for individuals and companies nor does it makedistinction between preventive insolvency proceedings and actual insolvency proceedings


The conciliation stage in a Bankruptcy trial encourages binding and reorganizing an agreement betweenthe debtor and its creditors and thus avoiding the debtorrsquos bankruptcy or liquidation The conciliationstage may not last more than 185 calendar days unless extended for up to two additional consecutiveperiods of 90 calendar days each however that in no event shall the conciliation stage last more than365 calendar days

Once the insolvency of the debtor has been declared the conciliation stage begins and tries to find asolution to allow the debtor and creditors to come to an agreement A conciliator who initially acts asan intermediary between the company and its creditors must direct this procedure

The conciliator shall act as an intermediary among the parties One of the functions or powers ofconciliator is to recognize claims based on the debtorrsquos accounting records in order to streamline theclaim recognition process The conciliator will also collaborate in the decision regarding whether thebusiness will continue to be operated by debtorrsquos restructuring the debt or whether it is necessary toremove existing management from the operation of the company

The main purpose of the conciliation stage is to preserve the operation of the debtorrsquos business Theconciliator is responsible to publish the deadline for creditors to submit proofs of claims processingproofs of claims serving as a mediator among the debtor and creditors and to propose a restructuringplan to the court


In Mexico insolvency may be declared if a company or individual has generally failed to perform anydebtor obligation The Bankruptcy Law establishes that a debtor may be declared insolvent in casessuch as

(i) It has defaulted its obligations contracted with two or more different creditors

(ii) The obligations of the debtor which have been due for at least 30 days represent at least 35 percent or more of all the debtorrsquos obligations on the date on which the demand or insolvency petition isfiled (or depends or both if it was an involuntary or voluntary petition respectively

(iii) The debtor does not have any of the following assets in an amount sufficient to perform at least 80per cent of its obligations due on the date on which the demand or insolvency petition is filed cash anddemand deposits term deposits and investments becoming exercisable or maturing in a term no longerthan 90 calendar days following the date on which the demand or insolvency petition is filed before thecourt securities or negotiable instruments available at the relevant markets which may be sold within aterm of 30 business days with a known value on the date on which the demand or insolvency petitionwas filed before the court


The bankruptcy trial has three stages the bankruptcy trial the conciliation and the liquidation

(i) In the first stage the Judge and the Auditor reviews whether the eligibility requirements are met bythe debtor and issues the Order for Relief or denies the request

246

(ii) In the second stage the Conciliator must determine who the creditors are and acts as a mediatorbetween the debtor and its creditors to propose a reorganization plan

(iii) Then if no plan is reached and the case proceeds to a liquidation the Trustee must sell the assetsand pay creditors


A company or individual who request bankruptcy and any creditor or the Attorney General can file aBankruptcy lawsuit

A debtor may commence a voluntary reorganization proceeding under the Bankruptcy under theseconditions

(i) a payment default has occurred with respect to the claims of at least two creditors

(ii) payments are past due for more than 30 days and represent 35 or more of all the debtors paymentobligations as of the date of the filing andor

(iii) the debtor does not have liquid assets to pay at least 80 of the obligations past due as of the dateof the filing

A creditor whether unsecured or privileged or the Attorney General can file an involuntaryreorganization proceedings under the Bankruptcy Law only if the abovementioned these conditions areaccomplished


The Judge controls the bankruptcy proceedings and has the faculty to comply with the MexicanBankruptcy Law A case under the Bankruptcy Law will be assigned to a district judge which is Federaland he shall oversee the reorganization and bankruptcy proceedings


The conciliation period lasts 185 days the Conciliator or the creditors representing two-thirds of theamount of the recognized claims may request the first 90-day extension if they reasonably believe areorganization plan is achievable The second 90-day extension must be sought by both the debtor and90 of recognized creditors In no event may the conciliation last more than 365 days

Once the Court publishes the list of recognized claims the Conciliator is required to attempt to reach anagreement with the debtor and holders of recognized claims on a plan of reorganization

If the Conciliator believes that the debtor and a majority of holders of recognized claims support a planof reorganization for the debtor it must circulate the plan to all holders of recognized claims Suchholders will have ten business days to comment on the plan

About the insolvency period there is no time limitation The time depends on the amount of work of theauthority and the actions during the process


(i) Lawsuit or request

(ii) Admission

247

(iii) Notification

(iv) Eligibility review

(v) Bankruptcy claim

(vi) Conciliation phase

(vii) Liquidation phase

(viii) Order for liquidation

(ix) Creditor payments

Each one on the above mentioned steps have their own specifications procedures and notifications


(i) Request a bankruptcy and all its effects

(ii) To be declared as liquidation phase once all the formalities of the process have been completed


During the phase of conciliation the debtor may continue its ordinary course with a conciliatorreviewing the debtorrsquos operations and keep the management and possession of the assets unless theconciliator asks or justifies the removal of the same in such case the manager and the keeper of theassets will be the conciliator

Once the liquidation phase has finished the receiver will replace the company or individual and willtake the management and possession of the assets

In the event the debtor is removed from the management of its business the conciliator will become theadministrator and will be granted full authority to conduct the business on the understanding that theauthorities of the debtor and its decision-making committees shall cease


No the bankruptcy law in Mexico is of Federal application


Legally there is no intervention or participation from politics however the law and the Bankruptcy Laware subject to be reformed by the Congress which has political interests

3 Creditor issues


They are the last ones in collecting their credits

248


In the conciliation phase the warranties cannot be executed however the creditors should request theacknowledgments of their credits within the terms stipulated on the Bankruptcy Law and be recognizedby the Judge order

Once the liquidation phase has been settle down the creditors with warranty could collect from theprivileged creditors the product of the assets under credit warranty


After the date on which the Order for Relief is entered only the following claims may be set off

(i) Any rights in favour of and obligations owed by the debtor arising out of the same transaction unlessthe transaction is terminated by operation of law as a result of the Order for Relief

(ii) Any rights in favour of and obligations owed by the debtor that became due before the Order forRelief where the setoff is authorized under applicable law and any tax refunds to and tax claimspayable by the debtor


All the credits take effect and prevail until the liquidation and the consequence of the alienation of theassets to be paid nevertheless it should be taken into consideration for its payment the payment priorityand the creditor


No


A creditor committee cannot be established The law only allows the creditors that represent at least10 of the amounts of the credits in charge of the company or individual to make a petition to the Judgeto name a controller which will represent the interests of the creditors and will guard the functions of theconciliator receiver and the acts of the company or individual



The Conciliator acts as mediator between the debtor and its creditors and is responsible for preparing areorganization plan In addition the Conciliator monitors the administration of the company and presentsthe list of creditors to the judge The Trustee is appointed in the same manner as the other twospecialists when the judge gives notice that the liquidation phase has begun

The Trustee is entrusted with selling the assets of the estate in the event conciliation fails and the caseproceeds to liquidation It is not uncommon for the Trustee to be the same person designated asConciliator

249


By ordinary operations which includes essential expenses


In Mexico a debtor may similarly fund its operations through post-petition financing a new lenderhowever cannot be secured by a priming lien on encumbered property


The rights of the employees will be ensured for purposes of payment taking preference of all othercreditors


The validity of the agreements will not be affected under personal assets patrimonial or assets relativeto property or rights which management and disposal will be kept by the company or individual and theywill be indefeasible non-lassalle and inalienable

The effects under the agreements are established on the Title III Chapter V and Section II of theBankruptcy Law



(i) Oppositions Filed in the distinct phases of the processes considering the rules established on theBankruptcy Law

(ii) Appeal against the order of relief by the creditors controller the Attorney General or the auditor

(iii) Appeal of the order of liquidation by the company or individual by a recognized creditor or by theconciliator


The timing to file a claim has three opportunities

(i) within 20 days following the date of the publication of the Order for Relief

(ii) within five days of the filing of a provisional list of creditors by the Conciliator or

(iii) within nine days of issuance of the Order of Recognition Ranking and Preference of Claims


(i) Oppositions and

(ii) Appeal


250

Since it is a judicial proceedings the scenarios could be changed depending on the actions taken by thecreditors the company or individual and the controller and from the compliance of the auditorconciliator and the receiver obligations



They are not foreseen on the Bankruptcy Law

How the procedure is formally concluded

The Bankruptcy trial concludes by an order of relief by the Judge when (i) a plan is confirmed by theJudge (ii) the creditors received all their pending payments (iii) payments to creditors have been madethrough a Bankruptcy fee which corresponds to the obligations of the company or individual and nomore assets be left (iv) it is proved that the state is insufficient to cover all the credits against the state(v) the company or individual approved a plan and recognized the total of the creditors in the liquidationphase (vi) the company or individual and the creditors made a request


Creditors will collect in this order (i) Privileged creditors (ii) secured creditors (iii) creditors withspecial privileged and (iv) unsecured creditors



None available


None available



The company only recognizes the Bankruptcy Law or any other foreign procedure content of theBankruptcy Law Nevertheless the Bankruptcy Law does allow for the reorganization of branches andsubsidiaries of foreign


The Bankruptcy Law recognizes enforcement and foreign procedures in Mexico Their rules andrequirements are indicated in the same Law nevertheless foreigners could request in Mexico to open aBankruptcy trial

251

252

The Netherlands

Stephan van de Kant Partner Wieringa Advocaten

wwwwieringanl email vandekantwieringanl tel +31 20 624 68 11



Mortgage over real estate (notarial deed) mortgage over sea ships (notarial deed) mortgage overrestricted rights of real estate and sea ships (notarial deed)

Pledge over movable assets (physically handing over assets or privately executed deed) pledge overclaims and other rights against third parties (privately executed deed) pledge over intellectual propertyetc (privately executed deed)

Lien over any of the above assets either preliminarily or after judgment has been passed

Netherlands law is not familiar with floating charges


Transactions may be vulnerable to the actio pauliana which can be invoked by either a single creditoror a bankruptcy receiver in cases such as

(i) wrongful or fraudulent trading

(ii) transactions at an undervalue

(iii) transactions defrauding creditors or

(iv) preferences

Also fraudulent set offs may be voidable


Directors have a duty to act in the interests of creditors when a company is facing insolvency or isinsolvent Directors could face liabilities for example for wrongful or fraudulent trading misleadingannual accounts non- or late filing of annual accounts not properly keeping the books of the companyentering into agreements which the director knew the company could not perform wilfully makingperformance of an agreement impossible

2 Taking action


253

The Bankruptcy Act (BA) recognises three different types of judicial insolvency proceedingsBankruptcy Moratorium and Debt Restructuring In the Netherlands all three types are included inAddenda A B and C to the European Insolvency Decree (EC) no 13462000 of 29 May 2000 L 160(changed in January 2005 COM 2004 827)

Bankruptcy

The appointed receiver(s) has a duty to sell the companyrsquos assets for the benefit of the joint creditors Ifthe highest profit can be realised by selling the enterprise as a whole the receiver will try thisOtherwise he will sell the assets in part The directors of the company may try to avoid the winding upof the company by coming to an arrangement with the creditors through the court

Moratorium

An administrator is appointed Ordinary creditors no longer have the right to sell the companyrsquos assetsHowever preferred creditors keep that right if they have a judgment against the company Moratoriumproceedings are usually unsuccessful Most of them end in bankruptcy after a few days or weeks

Debt restructuring for Natural Persons

If a natural person is unable to reach an amicable agreement with his creditors he can request thedistrict court in his place of residence to draw up a debt management scheme based on the Debtrestructuring for Natural Persons Act (Wet schuldsanering natuurlijke personen Wsnp) The court willoblige the creditors to cooperate with this statutory debt restructuring The court will also appoint anadministrator who will help the debtor manage his assets

Elaboration

The estate incorporates all of the debtorrsquos property at the time of the judgement that admits him to thearrangement as well as all property that he obtains during the bankruptcy or application of debtrestructuring Some goods described in the Bankruptcy Act remain outside of the estate

The fixation principle applies to both bankruptcy and to debt restructuring The occurrence ofbankruptcy or debt restructuring means that the legal position of everything involved in the estatebecomes fixed

Due to the judgement in which the debtor is admitted to the bankruptcy or debt restructuring arrangementhe lawfully loses authority to have his goods at his disposal from that time onward these goods belongto the estate that is managed by the administrator or receiver He also loses the authority to conduct andto allow actual transactions in respect of these goods

He is obliged to surrender all goods that belong to the estate on the request of the administrator orreceiver The debtor must obtain permission from his administrator or receiver for some legaltransactions such as entry into a credit transaction

If a clean sheet (ldquoremission of debtsrdquo) is provided to the debtor on completion of debt restructuring itapplies to all creditors even to individuals who have not submitted their claim to the receiver There isan important restriction here the debt restructuring arrangement only works in respect of claims thatexist at the time of the pronouncement in which the debtor is admitted to the arrangement Claims arisingafter the date of the admission judgement are new debts do not therefore fall under the debt restructuringand the discharge also cannot involve them

In bankruptcy the supervisory judge may specify at the request of each interested party that a third party

254

recovery competence may not be exercised for a maximum of one month to be extended by a maximumof one month the so-called cooling-off period The administrator can form a picture of the estate Thiscooling off order can therefore also involve the mortgage holder or pledge holder or the individual withan ownership proviso

There may be provisional admission to the debt restructuring arrangement in anticipation of a finaljudicial judgement This legal facility is seldom used by the Court and only in acute emergencysituations such as a threatened house eviction

As soon as debt restructuring is provisionally or finally declared applicable an overall moratoriumapplies against creditors as far as legal exercise is concerned Attachments already made will lapse andexecutions already started will be suspended Legal or contractual interest likewise stops from that timeonwards In debt restructuring the supervisory judge may also specify a cooling off period by order atthe request of each interested party

Registration of all current insolvency proceedings takes place in the Central Insolvency Register (CIR)at the Court for Jurisprudence in The Hague this may be consulted via wwwrechtspraaknlregisters


Voluntary arrangements with the creditors have no basis in the law Therefore all creditors need to be infavour for such an arrangement to succeed There is case law whereby one (or two) creditors are forcedto participate in an arrangement

Sale of the enterprise before bankruptcy


The sole objective of bankruptcy proceedings is liquidation of the available equity to distribute amongthe creditors It is therefore to be considered creditor-friendly

The moratorium proceedings have a restructuring objective rather than liquidation in order to preventthe latter Moratorium if successful is primarily aimed at the debtorrsquos interest

The debt restructuring proceedings in Court have a double objective liquidation of the available equityand restructuring of the debt burden


In the case of bankruptcy the debtor (entrepreneur or private individual) must be in the situation wherehe has ceased to make payments

In the case of moratorium the debtor must foresee that he will not be able to continue paying his duedebts The moratorium proceedings are reserved for entrepreneurs

In the case of the Debt Restructuring for Natural Persons Act

(i) either it can reasonably be foreseen that the person will not be able to continue paying his debts

(ii) or the person is in the situation of having ceased to make payments

The court must be satisfied that the company is or is likely to become unable to pay its debts as theyfall due

255

What is the process for filing Who can place the company into insolvency proceedings

Bankruptcy is open to both natural persons and corporate bodies The debtor must be in the situationwhere he has ceased making payments This means that there is at least a due debt and a claim forsupport The Bankruptcy Act does not require any (judicial or extrajudicial) preparatory proceedingsThe Court does however require a well-founded petition

If the debtor is temporarily no longer able to pay your debts it can ask the court to grant a moratoriumThe debtor will have to ask a attorney at law to submit the application Arranging moratorium can helpthe debtor avoid bankruptcy Only the debtor has the possibility to apply for the moratorium in otherword creditors do not have that possibility Moratorium is not granted to a natural person who does notpractice an independent profession or business nor is this the case for an insurer

Debt restructuring is only open to natural persons Several criteria apply to the debt restructuringarrangement

Prior to application of the legal debt restructuring arrangement the law imposes mandatory pursuit of anextrajudicial phase On the grounds of a model statement issued by the municipality it must be evidentthat there have been attempts to reach an amicable settlement Why these attempts have been in vain mustalso be evident The debt assistance provision at a local level supports this so-called amicable phase

The following applies when applying debt restructuring

(i) An incurable debt burden must be involved in other words there is no prospect of repayment

(ii) The debtor must enclose a model statement with the restructuring application completed by themunicipality and signed by him in person and must also submit a complete petition to the Court asdescribed in Section 285 BA

(iii) The debts must have arisen or remained unpaid in good faith The Court will interpret this opencriterion in each case Debts from criminal acts are not regarded as arising in good faith In accordancewith jurisprudence from the Supreme Court and the Directives of judicial policy it is important here thatno attempts have been made to disadvantage creditors It is also important that the debts have not arisenor remained unpaid very recently and that where in any way possible there has been partial repaymentalong with its frequency In other words there is no consequent pattern of incurring debts withoutdemonstrable improvement


The Court takes the most consequential decisions in the bankruptcy and in the debt restructuringarrangement such as admission or refusal of the proceedings and granting discharge in debtrestructuring or a levy from the bankruptcy or a possible interim termination of debt restructuring TheCourt may also dismiss the receiver or administrator if he neglects his legal duties

An acting supervisory judge is appointed from the Court for the numerous decisions of management andsupervision of the estate during the term of the proceedings This individual supervises the receiver oradministrator grants permission for some transactions and decides on possible complaints frominterested parties

As soon as the Court has opened insolvency proceedings it appoints both a supervisory judge and areceiver (in bankruptcy) or administrator (in moratorium or debt restructuring) The tasks of the receiverand administrator are described as follows in the Act supervision of compliance by the debtor with theobligations arising from the law and managing and liquidating the estate These tasks apply regardless

256

of whether the debtor is a private person or a company

In the moratorium arrangement the administrator must conduct the management of the estate together withthe debtor

A bankruptcy is sometimes declared on the debtorrsquos own initiative but this is generally done on theinitiative of a creditor If this is rejected the creditor has the right of higher appeal if it is admitted thatthe debtor has a right of higher appeal On behalf of the creditors the receiver can nullify certain legaltransactions conducted by the debtor up to one year before the bankruptcy that have resulted in creditordisadvantage for example a sale of valuable property well below market value The verificationmeeting chaired by the supervisory judge offers creditors the chance to have their say Creditors maysubmit a complaint about the receiver to the supervisory judge

Duty of effort in debt restructuring the debtor who is admitted to the debt should exert maximum effortfor his creditors for a period of three years so that as much money as possible comes into the estate Forthree years he will have to make his capacity to repay available to his creditors up to 95 of theapplicable support level

Both in bankruptcy and debt restructuring there is a duty to inform the administrator or receiver fully andaccurately about everything that he knows of or can understand that is important for proper completionof the proceedings Failing to comply is punishable


The law does not specify the term of a bankruptcy Most bankruptcies are completed within eighteen tothirty-six months generally with a lack of revenue and based on the simplified proceedings withoutverification Complicated major bankruptcies often take longer The supervisory judge monitors theprogress made by the receiver

As a rule debt restructuring takes three years In exceptional cases this period can be longer but neverlonger than five years In exceptional cases the debt restructuring period can also be shorter up to aminimum of one year if the Court saw no reason to hold a verification meeting These latter proceedingsare also referred to as simplified debt restructuring and are reserved for those cases in which it isestablished that near enough nothing will be regained from their claim


The directors of the company have the right to propose an arrangement to the creditors in court Alsothey have the right to request the court to dismiss the receiver


No


A proposal for a new Bankruptcy Act was thrown off the table in 2011 There are advanced plans tointroduce a pre-pack which is already being used in some courts There are early plans to introducestronger obligations to cooperate with the receiver by both the bankrupt(s directors) and third parties

3 Creditor issues

257


All liens are lifted as a consequence of a bankruptcy Individual creditorrsquos rights vis-agrave-vis the debtorare lost in favour of the receiver


The same way it would if the company were not in bankruptcy Secured creditors have the right toenforce their security for the full amount of the debt If the value of the debt exceeds that of the securitythe creditor will rank as unsecured for the balance


Set-offs apply as long as they are not fraudulent In most cases contractual limitations to set-off remainin force some statutory limitations are lifted


Paying inter-company debts before other debts may under circumstances be fraudulent


If the figures of subsidiary companies are included in the financial statements of the parent company andthe parent issues a ldquojoint and several liability statementrdquo assuming responsibility for all debts of thesubsidiary companies then the intermediate company can refrain from consolidation Furthermore anaudit is not required A declaration in writing with the shareholdersrsquo resolution on the joint and severalliability and the consolidated parent financial statements prepared in accordance with the 7th EuDirective is required to be filed with the Chamber of Commerce


A creditor committee is common only in big bankruptcies It needs to be consulted for several decisionstaken by the receiver giving it the opportunity to appeal to the supervisory judge from receiverrsquosdecisions



In bankruptcy the receiver controls the assets of the company With permission from the supervisoryjudge the receiver may continue the business for a limited period of time under his supervision Thereceiver will only do so when he can be sure that the profits will outweigh the costs

In a moratorium the company is run by the receiver and the directors jointly


Bankruptcy expenses will rank above all other claims but those of excluding secured creditors Theadministrator may borrow with the permission of the supervisory judge and vest security over assets


The declaration of bankruptcy may entitle a contract counterparty to terminate its contract with the

258

debtor depending on the terms of the contract The moratorium does not prevent a counter-party fromexercising its right to terminate a contract with the company if the contract contains such a right (thoughit prevents legal process being commenced)



No obligation exists for the creditors to submit all claims to the receiver or administrator Anyonewishing to share in the income which is paid out via what is referred to as a distribution list to knowncreditors does need to submit his claim

Claims are filed in writing with the receiver They state the nature of the claim In case of a preferredclaim the legal basis of the preference is mentioned Documents supporting the claim are provided


Claims need to be filed within a time frame set by the supervisory judge only when both the receiver andthe supervisory judge are of the opinion that there is a chance that the creditors may expect a paymentThis time frame is communicated by the receiver to the creditors of whose existence he is aware


In bankruptcy the following rules of priority apply

(i) the receiverrsquos costs of realising fixed assets

(ii) obligations incurred by the receiver

(iii) general expenses and costs of the bankruptcy

(iv) preferential creditors

(v) unsecured creditors including the value of the debt exceeding the security of secured creditors

(vi) shareholders


None other than those prescribed under the EC Regulation



Bankruptcy does not result in a cram down of the companyrsquos debt However the receiver may assist infacilitating an arrangement

Cram down is available for such arrangement Proposals usually need to be approved by more than half

259

in value of the creditors and more than half in number of the creditors as well as the court


Bankruptcies may end by

(i) termination by the court and dissolution of the company

(ii) distribution to the preferred creditors and dissolution of the company

(iii) distribution to the ordinary creditors and dissolution of the company

(iv) full payment to all creditors

(v) approval and performance of a scheme of arrangement

Most bankruptcies end in termination by the court without distribution to any of the creditors

7 International InteractionWhat international framework of rules apply to the company


Governing rules include

(i) the EC Regulation insolvency proceedings opened in a member state must be recognised in all othermember states

(ii) Insolvency Act of 1893

(iii) case law

(iv) court rules by the Counsel of Supervisory Judges in Insolvency (RECOFA)

(v) soft law best practice rules laid down by the professional organisation of insolvency practitioners

260

New Zealand

Jeremy Carr Partner Burton amp Co

wwwburtoncoconz email jacburtoncoconz tel 00 64 9 300 3777



If the assets in question are those other than land then generally by complying with the requirements ofthe Personal Property Securities Act 1999 (ldquoPPSArdquo) and the Personal Properties Securities RegisterCompany assets involving land require that a mortgage be taken over the land Other common lawsecurity arrangements also exist such as liens however these are generally of lesser effect againstregistered securities


Yes the voidable transactions process under the Companies Act 1993 enables liquidators to recoverpayments and other benefits conferred on particular creditors at a time when the company was unable topay its due debts Generally speaking this can be anyway up to 24 months prior to the appointment of aliquidator and transactions made within 6 months of the appointment of a liquidator are at a greater risk


Personal fines can be imposed andor restoration orders granted depending on the nature andsignificance of the breach concerned

2 Taking action


The two key procedures are receivership or liquidation There is also the relatively new and less usedprocedure of voluntary administration This memo is primarily concerned with receivership andliquidation procedures given the relatively uncommon use of voluntary administration in New ZealandLiquidation has been New Zealands main form of insolvency and is highly regulated


Procedures such as shareholder bail outs or informal creditor compromises


In a receivership situation the assets are generally realised for the benefit of the secured creditor whomade the appointment In a liquidation procedure the assets are realised primarily for the benefit ofunsecured creditors All involuntary insolvency situations are generally creditor friendly as opposed toa voluntary wind up which can be debtor friendly

261


The trigger for receivership is generally default under an agreement with a creditor for non-paymentLiquidation is generally brought about by a companyrsquos failure to pay its debts as they fall due andinability to continue to trade In short a company must at all times satisfy the solvency test under theCompanies Act 1993 meaning that

(i) A company must be able to pay its debts as they become due in the normal course of business and

(ii) The value of its assets must be greater than the value of its liabilities (including contingentliabilities)


Public notice must be given with a copy of the public notice to the Companies Office Registrar withinseven days after the appointment of a liquidator or receiver


Shareholders and directors may place a company into voluntary liquidation or receivership Creditorsmay take the step of applying to the High Court to place a company into an involuntary liquidationSecured creditors also generally have the right under security agreements with a company to appoint areceiver on breach of a security agreement obligation


The Court can make a determination based on submissions made by a creditor or creditors and thecompany about non-payment of debts If the company is not in a position to pay the debt or enter into anarrangement to pay the Court may place the company into liquidation The Court can either appoint aprivate liquidator (such as a suitably qualified chartered accountant) selected by the creditor or theOfficial Assignee


There is no set time frame as each is determined by the complexities and relevant facts surround theinsolvent company


A Receiver must prepare an initial report on the state of affairs with respect to the property inreceivership (generally done within 2 months of appointment) In addition to the first report a receivermust prepare further reports at the end of each six-month period and at the end of the receivership Thesereports must summarise the state of affairs with respect to the property in receivership as at those datesand the conduct of the receivership including all amounts received and paid during the period to whichthe report relates

In a liquidation process directors are required to complete a Statement of Affairs form which includes abrief description of the companyrsquos history trading details details of the cause of the companyrsquos failureall company assets all company liabilities all shareholder information and any legal claims pending byor against the company

A liquidator will then send a report to all creditors outlining the companyrsquos financial position at the dateof liquidation The report is usually sent 25 working days after the date of liquidation The report willexplain how the liquidator intends to manage the liquidation and how long it will take to complete The

262

Official Assignee sends creditors an update on the liquidation every six months until the process hasbeen completed A final report is then sent to all creditors


No


New Zealand has the PPSA which codifies the law on all personal property securities (personalproperty generally being all assets other than land) The PPSA legislation was modelled on theCanadian system and has now been followed by Australia The PPSA has its own very particularrequirements that can be very different from common law As an example title to goods in a receivershipsituation can be and often is largely irrelevant


Very unlikely

3 Creditor issues


While they can file a claim for monies owing by the insolvent company they will generally lose out tosecured creditors


The first secured creditor will generally look to appoint a receiver Lesser ranking secured creditorswill look to work with the first secured creditor if possible Creditors with specific security chargesover certain company assets such as a ldquoPMSIrdquo under the PPSA will look to take possession of the assetsin question


Mutual credits mutual debts or other mutual dealings between a company and a person must be set offand only the balance may be claimed in the liquidation or is payable to the company Insolvency set-offis not available to a creditor in relation to a transaction or assignment made during a specified periodprior to the insolvency unless the creditor establishes it did not have reason to suspect that the companywas unable to pay its debts as become due This prohibition does not apply to voluntary administration


The voidable transactions process can apply


Yes in situations where transactions between companies fall foul of the voidable transactions process


In the case of administration a creditor committee can be established but its powers are limited as it hasno power of direction over the administrator concerned but is entitled to be consulted by the

263

administrator as to matters relating to the administration The committee also receives reportsconcerning the progress of the administration



A receiver (or joint receivers) in a receivership situation and liquidator in a liquation Directors remainbut lose their ability to act They must cooperate with the liquidator so the affairs of the company arefairly and equitably resolved however they donrsquot have any day to day responsibilities for the operationsof the company following the appointment of the liquidator


Generally through existing company revenue sources New lines of funding from third party lenders areoften not available unless a company in receivership stands a chance of trading out of trouble or beingsold


No DIP is not a known funding product in New Zealand


Employees with any claims for unpaid salary or wages and holiday pay are treated under law aspreferential claims meaning that they will rank ahead of unsecured creditors if there are funds availablefor payment This does not apply to employee payments to directors or their families


Unless the liquidator agrees or the court orders otherwise legal proceedings cannot be commenced orcontinued against the company and no enforcement rights or remedies over or against company orproperty can be exercised A liquidator also has powers to disclaim what it considers onerous contractsincluding leases



The liquidator will ask creditors to provide details of all debts owed by the company A claim formmust be completed and filed with a liquidator and creditors may need to provide a copy ofdocumentation showing a debt existed at date of liquidation (for example copies of loan agreementsbank statements court orders invoices receipts and acknowledgments of debt) Generally the claimmust also state with it is preferential ordinary or deferred claim


Generally as specified by the liquidator (unless a Court has ordered otherwise)


264

In the case of liquidation the following are generally paid out in this order

1 Secured Creditors secured creditors who have a claim against a specific asset of the company orclaim over all of the assets of the company

2 Liquidatorrsquos expenses the liquidator has a priority claim on all assets recovered in the liquidationThis includes any expenses incurred by the liquidator in the ongoing running of the business (staff wagesfrom the date of liquidation rent etc)

3 Creditor court costs the costs of a creditor who petitioned the court to liquidate the company

4 Staff wages staff wages of company employees earned in the last four months and all holiday pay (upto a maximum of $16420 per employee)

5 Inland Revenue Department The IRD is paid any PAYE and GST owing by the company

6 Unsecured Creditors Once all of the above expenses are paid out the unsecured creditors are paidnoting that it is unusual for unsecured creditors to be paid in a typical liquidation

7 Shareholders After all other costs have been paid out in full the shareholders receive the balance ofany funds This almost never happens




No however lsquoinformalrsquo cram down procedures often come into play for lenders that have a second orlower ranking security upon the discovery that the security may be worthless and the prior rankingsecurity holder and debtor are either planning to restructure or to sell leaving lower ranking securedcreditors with nothing The ability of senior creditors to cram down junior parties is often animportant component of a successful restructuring in an insolvency situation


When the liquidation procedure is complete the company is struck off the Companies Office registerWhen the receivership ends the receiver must send or deliver to the Registrar notice in writing of thefact that the receivership has ceased


Secured creditors always stand a better chance of recovery of monies as opposed to unsecured creditorsnoting that in many instances you must be the first secured creditor with a general charge over all thecompany assets (as is standard banking policy in New Zealand) to successfully recover monies owingand that even secured creditors often lose out to a first secured creditor in such case


265


Generally case specific and will depend on the commercial parameters involved although the ability andappetite of shareholders to bail a company out andor the likelihood of repackaging the company or itsassets for sale are two key drivers


A sale of the company or its assets often will accelerate insolvency situation



The Insolvency (Cross-border) Act 2006 is the first comprehensive attempt to regulate different types ofcross-border insolvency issues in New Zealand The centre piece of the 2006 legislation is its firstschedule (Rules applying to cross-border insolvency proceedings) which closely follows theUNCITRAL Model Law on Cross-Border Insolvency 1997


There is no statutory bar on the appointment of an overseas liquidator in New Zealand but the courtshave indicated that this person should preferably be a New Zealand resident

Foreign creditors are dealt with in the same manner as domestic creditors in respect of liquidations andreorganisations

Foreign judgments or orders are recognised where they conform with the Reciprocal Enforcement ofJudgments Act 1934

266

Romania

Dana Isaroiu Partner Fine-Law

wwwfine-lawro emaildbfine-lawro tel +40 21 230 0142

The responses herein below were provided based on the following Romanian normative acts in force in2014

The Romanian Civil Code promulgated by Law 71 as of 2011 as subsequently amended andsupplementedThe Law no 852014 on the insolvency procedureThe Romanian Civil Procedure Code promulgated by Law 76 as of 2012 as subsequently amended andsupplemented andCouncil regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings

1 Issues arising when a company is in financial difficulties1


According to the Romanian law a creditor may secure his receivable against a debtor by placing amortgage a pledge or other legal security interests or retention rightsliens on the debtorrsquosgoodsassets By doing so he becomes a secured (privileged) creditor

In Romania the mortgage is defined as a real guarantee over mobile or fix goodsassets whethertangible or non-tangible Unlike the mortgage the pledge involves the actual conveying of the goodassetto the creditor therefore the pledge may only be placed over tangible assets Similarly a person whohas the obligation to return or to remit a goodasset to a creditor is entitled to retain such goodasset aslong as the creditor does not perform at his turn his own obligations sourcing from the same legalrelationship groundssource or does not reimburse the necessary and useful expenses made in relationwith that goodasset or the damages caused by that goodasset

As a rule of thumb from the date of the commencement of an insolvency procedure all contentious non-contentious or enforcement procedures against the insolvent company are suspended and the creditorscan no longer take security over the assets The suspended contentious non-contentious or enforcementprocedures are terminated on the date the court decision ordering the commencement of the insolvencyprocedure becomes final

Nonetheless in a number of cases a secured creditor may request the syndic judge to revoke thesuspension with regard to its security and the immediate capitalization of such security asset within theinsolvency procedure


Yes

The receiver (judicial administrator) or where applicable the liquidator may petition the syndic judgeto cancel fraudulent deeds and operations concluded by the debtor to the detriment of creditors rights

267

within the last 2 years preceding the commencement of the insolvency proceedings2

The following deeds and operations may be cancelled resulting in the return of the transmittedgoodsassets and of the value of other performed actions

a) free of charge transfers occurred within the last 2 years before the commencement of the insolvencyprocedure (sponsorships for humanitarian purposes are exempt)

b) operations where the debtorrsquos obligation obviously exceeds the benefit received made within the last6 months before the commencement of insolvency proceedings

c) acts concluded within the last 2 years before the commencement of the insolvency procedure with theintention of all parties involved in them to conceal assets from pursuing creditors or harming thecreditors in any other way

d) acts of transfer of property to a creditor to extinguish a prior debt or in the benefit thereof made inthe 6 months days prior to the insolvency procedurersquos initiation if the amount that the creditor mayobtain during the insolvency proceedings is less than the one specified in the transfer deed

e) establishment of a preference right for a previously unsecured debt during the 6 months precedingthe commencement of the insolvency procedure

f) prepayments made in the 6 months prior to the commencement of the insolvency proceedings if duedate was set for a date later than the commencement of such proceedings

g) deeds of transfer or obligation undertakings by the debtor in a period of two years preceding the dateof the commencement of the insolvency procedure with the intent to hide delay insolvency status or tofraud a creditor

Additionally the law stipulates a series of transactions concluded within 2 years preceding thecommencement of the insolvency procedures with a number of debtor affiliates (associates membersadministrators shareholders controlling persons etc) that are also cancellable and therefore therelevant obtained benefits returnable if such transactions were entered into with the intention to harmthe creditors


Liability of the debtorrsquos management may be engaged in case the debtorrsquos directors or auditors or otherpersons fraudulently determined the debtorrsquos insolvency

Thus upon the request of the judicial administrator or the liquidator the syndic judge may decide that thesupervising or the managing bodies of the company as well as other persons that contributed to theinsolvency status of the debtor may be held liable for a part or for all of a debtorrsquos liabilities At thesame time the judicial administrator or the liquidator may ask the syndic judge to undertakeconservatory measures in relation to the property of the persons sued as culpable

Liability of the debtorrsquos managing persons cannot be triggered in cases where such persons haveopposed within the relevant management bodies to the decisions leading to insolvency or in caseswhere such persons have been missing when such decisions were taken and have recorded theiropposition after such decisions had been taken

1 Note that if a company cannot meet its financial obligations it can enter either reorganization

268

(sometimes followed by bankruptcy in case of reorganization failure) or directly bankruptcy Theapplicable legal regime in the two cases is similar only to a certain extent

2 For the purposes of this presentation ldquoinsolvency proceedingsrdquo means both the judicialreorganization procedure and the bankruptcy procedure as such are defined in Section 2 of this material(ldquoTaking actionrdquo) in the answer to Question 2 point (i) Nevertheless whilst the judicialreorganization procedure is a procedure by which the debtor is allowed to continue its business basedon a reorganization plan with an aim to rescue the company as a going concern the bankruptcyprocedure is aimed at satisfying the creditors which involves the capitalization of the companyrsquos assetsto the benefit of the creditors and for the purpose of satisfying their receivables followed by theliquidation of the company

2 Taking action


The Romanian law provides for two different insolvency proceedings the general procedure and thesimplified procedure

(i) The general procedure

The general procedure generally applies to persons falling under the definition of bdquoprofessionalsrdquo asstipulated in the Romanian Civil Code namely persons that exploit an enterprise (with lucrative or non-lucrative scope) As an exception certain professionals are subject to the simplified procedure in casesenumerated by law (and mentioned at point (ii) immediately below)

Under the general procedure the debtor enters after a period in which it is placed under surveillanceeither successively into judicial reorganisation followed by bankruptcy or as the case may beseparately into judicial reorganisation or bankruptcy only The period of surveillance is defined bylaw as the period between the date of the commencement of the insolvency procedure and the date ofconfirmation of the reorganization plan or where applicable the date of commencement of thebankruptcy procedure

Judicial reorganisation is defined by law as an insolvency procedure that applies to the insolventdebtor legal person in view of paying its debts according to a reorganisation plan The procedureinvolves the making approval confirmation implementation of such reorganization plan and thecompliance with that plan which may provide together or separately the following

a) Operational andor financial restructuring of the debtor

b) Corporative restructuring by modification of share capital structure

c) Restraining the activity by way of partial liquidation of the assets owned by the debtor

Bankruptcy is according to law an insolvency procedure that is collective and egalitarian and isapplied to the debtor with the scope of liquidating its assets to cover its debts and is followed by thedeletion of the debtor from the registry in which it is registered When the bankruptcy procedure endsthe debtor ceases to exist

(ii) The simplified procedure

269

It applies to the following insolvent debtors that can be framed in one of the following categories

a) Professional individuals subject to registration in the Trade Registry with the exception of thoseexercising liberal professions (eg lawyers architects)

b) Family enterprises and members of family enterprises

c) Debtors that are professionals and meet one of the following conditions they do not own any assetstheir statutes or accounting documents cannot be found their administrator cannot be found theregistered company or professional headquarter does not exist anymore or does not correspond to theaddress registered in the Trade Registry

d) Legal persons that are dissolved voluntarily judicially or as an effect of law before the insolvencyrequest is filed even in cases the liquidator has not been appointed or although appointed registrationof such appointment has not been made with the Trade Registry

e) Debtors that have declared by their own insolvency request their intention to go to bankruptcy

f) Any person that undertakes activities that are specific to professionals which have not obtained theauthorization required by law for exploitation of an enterprise and is not registered in any dedicatedpublic registries

The simplified procedure places the debtor directly into bankruptcy procedure


The judicial reorganization procedure and the bankruptcy procedure are the only actual insolvencyprocedures to be used for covering the debtorrsquos liabilities

In situations where the debtor has not yet become insolvent but is facing financial difficulties the lawestablishes two options that the debtor and respectively the creditors may have as the case may be inview of saving the debtor from an eventual insolvency These procedures are

(a) The ad-hoc mandate ndash a confidential procedure triggered by de debtorrsquos request when facingfinancial difficulties by which an ad-hoc mandatary of the debtor appointed by the competent courtnegotiates with creditors so as to reach an understanding between one or more of creditors and thedebtor with respect to the debtorrsquos liabilities

(b) The preventive concordate ndash a contract concluded between the debtor facing financial difficultieson one side and the creditors holding 75 of the value of the accepted and unchallenged debts on theother as endorsed by the syndic judge by which the debtor proposes a plan for recovery and payment ofdebts of such creditors and the creditors accept to support the debtorrsquos efforts to escape financialdifficulties

While the above four procedures may be qualified as formal since they are stipulated by law a debtor isnevertheless entitled to conclude arrangements with its creditors to sort out its debts before theinsolvency procedures are commenced but such arrangements do not prevent such creditors or otherthird parties from filing for insolvency or enforcing binding Court rulings against the debtor


270

The ad-hoc mandate and the preventive concordate may be considered as debtor-friendly since such areprocedures that may be followed before insolvency and their target is to avoid insolvency and to helpthe debtor escape financial distress

For the scenario in which insolvency has occurred the reorganization procedure might be considered adebtor-friendly procedure as it aims at keeping the company as a going concern and strengthening itsbusiness by pursuing a reorganization plan which may of course cause delays in payments towardscreditors whilst the bankruptcy procedure is a rather creditor-friendly procedure its purpose being thesatisfaction of the debtorrsquos creditors at the cost of sacrificing the company


Insolvency is defined by law as the status of the debtorrsquos patrimony (our note bdquopatrimonyrdquo meaning herethe the debtorrsquos assets and liabilities as a whole) characterized by insufficiency of funds available forpaying debts that are certain liquid and due as follows

a) insolvency is presumed when the debtor after 60 days from due date has not paid a debt to acreditor This presumption is not absolute - it can be overthrown

b) insolvency is imminent when it has been proven that the debtor will not be able to pay on maturitydate the engaged due debts with the funds that available on that date

Therefore the triggers for the commencement of the insolvency proceedings are the lack of liquidities asper letter a) above and respectively the imminent insolvency as per letter b) above


Insolvency proceedings require a written insolvency request to the competent courts Such request maybe filed by the creditors or by the debtor itself or by another person or entity entitled by the law TheAgency of Financial Supervision may also initiate the procedure but only against the financial entitiesunder its authority The insolvency request is admissible in case of an unpaid debt that is certain (ietheir existence is doubtless) liquid (ie have a definite or at least determinable amount) and due andexceeds RON 40000 (approx EUR 9000) A companyrsquos employee is also a creditor for insolvencypurposes if (s)he has a receivable against the company in amount of minimum 6 national gross averagewages

The debtor which has reached insolvency status is obliged to file for insolvency procedure in 30 daysfrom the occurrence of such status If on expiry of such term the debtor is engaged in good faith non-judicial negotiations for debt restructuring the debtor must file the insolvency request within 5 daysfrom the failure of such negotiations The same 5 days term is applied in case of good-faith debtors thathave reached insolvency status while pursuing the ad-hoc mandate or the preventive concordateprocedures provided that there are strong indications that such procedures may lead to an extra-judicialagreement with creditors

The debtor facing bdquoimminent insolvencyrdquo (as defined by law and noted above) may but is not obliged tofile an insolvency request


The competent courts of law (County Tribunals) on the request of the entities mentioned in the answernoted immediately above


271

All proceedings regarding judicial reorganization and bankruptcy except for the appeals filed againstthe syndic judgersquos decisions (which are subject to the higher jurisdiction of the Courts of Appeal) areunder the exclusive competence of the Tribunal having jurisdiction over the administrative unit (County)in which the debtor has lastly been headquartered (and registered as such) for 6 months or more Thesyndic judge is randomly selected through a computerized system amongst the specialized judges withinthe respective Tribunal

As a rule of thumb the syndic judge controls the judicial procedure while commercial decisions meantto redress the debtor andor satisfy the claims of the creditors belong to the receiver or to the liquidatoras the case may be

Amongst the numerous procedural attributions of the syndic judge are as follows (a) to decide uponcommencement of the insolvency procedure both general as well as simplified procedure (b) toappoint or as the case may be replace the temporary receiver or liquidator and set forth theirattributions (c) to confirm the receiver or the liquidator appointed by the creditorsrsquo assembly (d) tosettle the potential objections filed by the creditorsrsquo committee the debtor or any other persons againstthe measures taken by the receiver or the liquidator (e) to examine the actions filed by the receiver orby the liquidator for the cancellation of the fraudulent actions committed before the opening of theinsolvency procedure and for the nullity of payments and operations undertaken by the debtor withoutright after the commencement of the insolvency procedure (g) to decide upon the closing of theinsolvency procedure


In practice insolvency proceedings are lengthy and have a tendency to stretch over several years Notime frameworks are established or imposed by law except the one regarding the reorganization planwhich forms the back-bone of the judicial reorganization procedure Thus such reorganization plan isvalid for 3 years from the date of its confirmation


Further to the commencement of the insolvency procedure the receiver or the liquidator shall send anotice to the debtor creditors and to the Trade Registry office or to any other registry where the debtormight be registered This notice will also be published in a large circulation newspaper as well as inthe Insolvency Procedure Bulletin

After the court decision establishing the commencement of the insolvency procedure becomes final alldocuments and correspondence of the debtor receiver or liquidator shall contain the annotation ldquoininsolvencyrdquo in Romanian English and French After the debtor enters judicial reorganization orbankruptcy the annotation shall stipulate such status as applicable

Following the notification from the receiver or the liquidator the creditors may submit their claims Suchclaims shall be recorded with a register maintained with the competent court of law After all claims areverified the receiver or the liquidator shall establish a preliminary table of debts Such table may bechallenged by creditors debtor and other interested third parties


The debtorrsquos general meeting or assembly has the right to appoint a representative as a specialadministrator (other than the court appointed receiver) in order to represent the associates shareholders members of the debtor and to participate in the insolvency procedure on behalf of thedebtor in case the debtor is allowed by the syndic judge to remain in control of its own managementduring insolvency

272

On the date of commencement of the insolvency procedure all contentious or non-contentious actions ormeasures for the enforcement of claims against the debtor or its assets shall be suspended by law

Any interest penalty for late payments or any other penalty deriving from debts to be claimed before thecommencement of the insolvency procedure cease to accrue (with some exceptions provided by law)and the debtorrsquos shares are suspended from transactions on the stock exchange market until theconfirmation of the reorganization plan The titles issued by the debtor are removed from the regulatedfinancial market when the debtorrsquos bankruptcy occurs

Additionally no utility supplier whether electricity natural gas water phone services or other similarhas the right to change refuse or temporarily cease the supply to the debtor or its assets of such utilityduring the observation period and judicial reorganization period if the debtor is a captive consumeraccording to law


Whilst aiming at satisfying the creditorsrsquo interests as much as possible the law offers the debtor alimited possibility of self-management which is subject to an approved reorganization plan As a ruleupon the commencement of the insolvency proceedings the debtorrsquos right to manage its own activityceases The management of the debtor is entrusted with the receiver unless the debtor has expressed itsintention to be subject to judicial reorganisation in such case the debtor retains the right to manage itself(through the special administrator appointed by the statutory assembly ofmembersassociatesshareholders of the debtor) until the commencement of the bankruptcy procedure

That said we may reasonably assert that the insolvent company is a bdquodebtor in possessionrdquo during thejudicial reorganization procedure (subject to the conditions noted above) Nonetheless even in suchcase the debtor is procedurally supervised by the syndic-judge and operationally under the surveillanceof the receiver Furthermore the syndic judge may revoke the right of management of the debtor if anycreditor or the receiver provides that there is an indication that losses have continued to accrue or thereis no likeliness of a reorganization plan being worked out However loss of management right does notimply the loss of property right over the debtorrsquos assets

3 Creditor issues


According to law in case of sale of encumbered assets (mortgage pledge any other security interests orliens of any kind) the amount obtained shall firstly cover the sale related expenses including fees andexpenses related to the preservation and administration of such assets Secondly the interests of thesecured creditor in relation to an asset shall be satisfied before those of the unsecured creditor Thus ifthe secured creditorrsquos claim exceeds or equals the sale amount the unsecured creditors are forced towait until other liquidities are made available if the case may be or risk the impossibility to recovertheir claim Unfortunately in most cases of bankruptcy the unsecured creditors do not satisfy their debts


The procedure for the liquidation of the debtorrsquos assets is carried out under the control of the syndicjudge who supervises the activity of the liquidator and takes the necessary steps for the sale of thedebtorrsquos assets and the distribution to the creditors of the amounts resulting from the liquidation As arule of thumb a secured creditor cannot enforce its security individually and by a separate action once

273

the insolvency procedure has commenced Nonetheless in a number of cases a secured creditor mayrequest the syndic judge to revoke the suspension with regard to its security and the immediatecapitalization of such security asset Whether sold prior to the commencement of or during thebankruptcy proceedings the assets that make the object of the security must be sold by auction or bydirect sale and the amount thus obtained shall be distributed with the observance of the order imposedby the law as mentioned at the point immediately above


According to Romanian law the commencement of insolvency proceedings shall not affect the right ofcreditors to claim compensation against the debtor if the conditions provided by law on compensationare met at the time of the commencement of legal proceedings


Principally intercompany debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholders or associate loans are ranked last on the claim rank list


No


The syndic judge may appoint taking into account the number of creditors a committee formed by 3 or 5creditors from amongst those having the right to vote holding biggest debts that benefit from apreference right and respectively budget debts and unsecured debts If due to the small number ofcreditors the syndic judge does not consider necessary the appointment of a creditorrsquos committee theattributions of such committee shall be exercised by the creditorsrsquo meeting or assembly

At the first session of the meeting of the creditors they can elect a creditorsrsquo committee made of 3 ndash 5creditors selected from amongst the first 20 creditors (based on the amount of their receivables againstthe debtor) The committee thus appointed will replace the committee previously appointed by thesyndic judge if the case

The main duty of the creditorsrsquo committee is to represent and defend the rights of the creditors in relationwith the debtor the judicial administrator or the liquidator and the syndic judge Consequently the mainattributions of the creditorsrsquo committee are as follows (i) to analyse debtorrsquos financial status and tomake recommendations to the creditorsrsquo assembly with regard to the debtorrsquos activity (ii) to negotiatewith the receiver or the liquidator the terms and conditions of their appointment (iii) to analyse thereports drafted by the receiver or the liquidator and if the case to challenge such reports (iii) to draftreports on the measures taken by the receiver or by the liquidator and the effects of such measures topresent such reports to the creditorrsquos assembly and to propose other measures if the case (iv) to requestthe withdrawal of the debtorrsquos right to manage its business (v) to file actions for the cancellation offraudulent deeds or operations made by the debtor to the detriment of creditors rights when suchactions were not filed by the receiver or by the liquidator



274

A The special administrator

As previously mentioned following the commencement of the insolvency procedure it may be the casethat the relevant shareholdersassociatesmembers are allowed to continue to control the debtorrsquosactivity Thus at the first session of the general meeting of the debtorrsquos shareholders they will appoint aspecial administrator whose role will be to represent the debtorrsquos interests as well as their interestsand to participate in the procedure on behalf of the debtor The special administrator has the followingmain attributions (i) to participate on the debtorrsquos behalf in the trials having as object the assessmentor cancellation of the fraudulent deeds and operations effectuated by the debtor after the opening of theinsolvency procedure that are not authorized by the syndic judge or approved by the receiver (ii) to filecomplaints during the insolvency proceedings (iii) to submit a reorganization plan (iv) to manage thedebtorrsquos activity under the supervision of the receiver after the confirmation of the reorganization plan ifthe debtor holds its right to self-management (v) once the bankruptcy procedure is initiated toparticipate in the inventory to sign the final report and the closing balance and to participate in themeeting convened for the settlement of the objections and the approval of the final report (vi) to receivethe notification regarding the closing of the proceedings

B The receiver (or judicial administrator)

Based on the offers submitted to the insolvency case file (or ex officio from the list of the NationalUnion of Insolvency Practitioners if no offers are available) the syndic shall appoint a provisionalreceiver At the first session of the creditorsrsquo assembly the creditors holding minimum 50 of theaggregate value of receivables may decide for the election of another receiver (an individual or a legalentity) authorized practitioner in insolvency and establish remuneration save for the case when suchremuneration shall be paid out of the liquidation fund established by law for such situations in whichcase the syndic judge sets forth the amount thereof This official receiver is in charge of fulfilling theactions relating to the insolvency proceedings until the bankruptcy is ordered The main attributions ofthe receiver are (i) to examine the debtors activity and the causes and circumstances which led to thestate of insolvency and to draw up reports on such matter (ii) to propose to the syndic judge either theapplication of the simplified procedure or the continuation of the general procedure and analyse theopportunity of the debtorrsquos reorganization and if the case draw up the reorganization plan (iii) tosupervise management operations of the debtor (iv) to pursue the collection of the debtorrsquos receivables(v) to file actions for the cancellation of fraudulent deeds and operations concluded by the debtor andharming the creditors rights as well as of certain asset transfers and business operations entered into bythe debtor and of the setting up of preference rights likely to prejudice the creditorsrsquo rights (vi) to terminate certain contracts concluded by the debtor

C The liquidator

In case the syndic judge decides upon the commencement of the bankruptcy procedure a liquidator shallbe appointed based on the same procedural steps applicable to the receiver as per point B above Theliquidator may also be the former receiver The mandate of the receiver ceases at the moment when thesyndic judge establishes the liquidators powers The main attributions of the liquidator are (i) toexamine the activity of the debtor who is subject to the simplified procedure with respect to the mattersof fact and drafting a detailed report of the causes and circumstances that led to insolvency bymentioning the potentially liable persons and potential grounds for engaging the latterrsquos liability if suchreport has not previously been drawn by a receiver (ii) to manage the debtors activity (iii) to fileactions for the cancellation of fraudulent deeds and operations concluded by the debtor and harming thecreditors rights as well as of certain asset transfers and business operations entered into by the debtorand of preference rights likely to prejudice the creditorsrsquo rights (iv) to place seals to make theinventory of the assets and to take the appropriate measures for their preservation (v) to terminate

275

contracts concluded by the debtor (vi) to pursue the collection of and cash in the debtorrsquos receivablesand to initiate legal claims and hire lawyers for that purpose (vii) to sell the debtors assets accordingto the provisions of the law (viii) to conclude transactions discharge debts discharge the personalguarantors and give up the tangible securities conditional upon confirmation of the syndic judge


During the reorganization procedure the companyrsquos activity continues Thus the company is financed bythe revenues generated by its activity The company may also be financed by revenues resulted from thesale of the companyrsquos assets


The commencement of the insolvency process does not automatically conduct to the termination of theexisting employment contracts After the commencement of the insolvency procedure the receiver or theliquidator may terminate urgently the individual employment contracts of the debtorrsquos employees Theliquidator has solely the obligation to serve the regular notice period to the dismissed employees asprovided in the relevant labour contracts


As a general rule the ongoing contracts are maintained as an effect of law on the date of thecommencement of the insolvency procedure Any contractual clauses establishing termination waiver ofterm benefits and anticipated maturity for reason of the commencement of the insolvency procedure arenull and void Within 3 months from the commencement of the procedure the receiver or the liquidatormay terminate any contracts unexpired leases other long term agreements as long as such contracts havenot been performed entirely or substantially by all contracting parties The receiver must respond in 30days from receipt to the notification of the contractor issued in the first 3 months from thecommencement of the insolvency procedure notification by which the receiver or the liquidator isrequested to terminate the contract In case there is no answer the receiver shall not be entitled to askfor the performance of the contract such contract being considered terminated

A contract shall be considered terminated

(a) on the expiry of 30 days from receipt of the request of the contractor regarding termination ofcontract if the receiver or the liquidator does not respond

(b) on date of such notification for termination issued by the receiver or the liquidator



The summoning of all parties as well as the communication of the procedural acts convening noticesand notices will be made by the Insolvency Procedure Bulletin an official insolvency publication thatfacilitates summoning or convening procedures and any document subpoena

Further to the commencement of the insolvency procedure the receiver shall send a notice to the debtorcreditors and the trade registry office or any other registry where the debtor might be registered at thedebtorrsquos expense This notice will also be published in a large circulation newspaper as well as in theInsolvency Procedure Bulletin Unless the notification on the commencement of the procedure was made

276

with the non-observance of the legal provisions (eg the receiverrsquos notification was not served to thecreditors with at least 10 days before the deadline for submission of creditor claims) the receivables ofa creditor who failed to submit its claims as established by the court decision establishing thecommencement of the insolvency procedure will be disregarded A term larger than 45 days of the dateof the commencement of the procedure cannot be granted by the court The employeesrsquo receivables areexempt from such rule such debts being automatically acknowledged registered by the receiver orliquidator


See above


According to the Romanian law claims shall be paid in the event of bankruptcy in the following order

1 fees stamp duties or other expenses related to the selling procedure established by law including thecosts necessary for the conservation and management of the debtors assets and payment remunerationof the judicial administratorreceiver or liquidator

2 receivables resulting from financing facilities granted to the debtor in the period of observation (aspart of the insolvency procedure) with the scope of performing its day to day business

3 claims arising from the employment relationship

4 claims resulting from the continuation of the debtorrsquos activity after the commencement of theinsolvency procedure as well as receivables owed to good faith third party owners that return theirproperty over goods (or the money equivalent) to the debtor when such return is made according to theinsolvency law

5 budgetary claims

6 claims representing amounts owed by the debtor to others based on maintenance obligationsallowances for minors or periodic payment amounts for ensuring livelihoods

7 claims representing amounts fixed by the syndic judge for the necessities of the debtor and his familyif he is a natural person

8 claims representing bank loans and interest expenses the results from the supply of goods services orother work rent lease contracts and bonds

9 other unsecured claims

10 subordinated debts in the following order of preference

(i) receivables belonging to bad-faith third party owners of former goods of the debtor as well asloans granted to a debtor legal person by a shareholder or stockholder holding at least 10 of theshare capital respectively of the voting rights in the general meeting of shareholders or whereappropriate to a member of the economic interest group

(ii) claims arising from gratuitous agreements

277



As mentioned above the courts are compelled to refrain from ruling on commercial matters beingsolely empowered to control the activity of the receiver andor the liquidator


If during any phase of the insolvency proceedings one ascertains that there are not enough assets in orderto cover all administrative costs and no creditor offers to make advance payments for this purpose thesyndic judge after an emergency hearing resulting in such refusal will issue a judgment for the closingof the procedure ruling also the removal of the debtor from the register where it is registered

The reorganization procedure is closed by a court ruling based on the receiverrsquos report after thefulfilment of all payment obligations undertaken by way of the confirmed reorganisation plan

The bankruptcy procedure is closed when the syndic judge has approved the final report all of thedebtorrsquos funds and assets are distributed and the unclaimed funds are deposited with the bank Further toan application from the liquidator the syndic judge shall issue a ruling closing the procedure andordering the removal of the company from the relevant register


As previously mentioned the claims of the creditors enlisted in the final table of debts shall be paid inthe order provided by the law According to the Romanian law the creditors from a lower category (thenon-secured creditors) are entitled to satisfy their receivables against the insolvent company only afterfull repayment of the creditors of a hierarchically superior category In the case of creditors having thesame priority ranking the amounts distributed shall be granted proportionally with the amount allocatedfor each debt in the final table of claims As a consequence low priority ranking creditors may be facedwith the impossibility of recovering their debts



No the Romanian law permits only a judicial procedure of insolvency for entities reaching insolvencystatus


We understand by ldquoavailable accelerated processesrdquo the direct entering into bankruptcy which thustheoretically allows the termination of the proceedings within approximately 1 year We have detailedabove the cases where the insolvent company may be made subject to the simplified procedure



278

Since the Romanian accession to the European Union (ldquoEUrdquo) in 2007 the international private lawaspects regarding insolvency are mainly regulated by the Council Regulation (EC) No 13462000 of 29May 2000 on insolvency proceedings The Regulation No 13462000 establishes a common frameworkfor insolvency proceedings in the EU The purpose of harmonized arrangements regarding insolvencyproceedings is to avoid assets or judicial proceedings from being transferred from one EU country toanother in order to obtain a more favourable legal position to the detriment of creditors


According to EC regulation no 13462000 EU judgments opening insolvency proceedings areautomatically recognized in Romania Any other bankruptcy judgments issued by non-EU courts may berecognized by the Romanian courts as long as they are not incompatible with the EU and Romanianlaws

279

Russia

Sergey Vodolagin Partner Westside Advisors

wwww-aru email vodolaginw-aru tel +7 499 608 06 01



A creditor may secure its claim to the debtor in two ways

(i) PledgeMortgage By entering into pledge (mortgage) agreement the creditor establishes securitywith regard to certain asset of the debtor thus enjoying several privileges in case of the bankruptcy of thedebtor (please see 32)

(ii) Interim measures The creditor may seek to obtain interim measures (injunction) from the statearbitrazh (commercial) court1 which prevent the debtor from disposing of his assets before the trial Thecreditor may seek such injunction before actual filing of the claim In this case the creditor must providea deposit in the amount of the damages which may arise out of the injunction


The bankruptcy manager (only) may challenge the following types of transactions entered into by theinsolvent debtor

(i) ldquoSuspiciousrdquo transactions The term ldquosuspiciousrdquo implies that the value of the transaction deviatesfrom the normal value of comparable transactions Only transactions entered into within one year beforefiling the petition are under risk

(ii) Transactions detrimental (aimed at causing harm) to the interests of the creditors The bankruptcymanager may also challenge the transactions aimed at impairing monetary interests of the creditors Thetransactions of the said type entered into within three years before filing the petition are at risk

(iii) Preferential transactions All transactions aimed at establishing a priority of one creditor over theothers with regard to the debtorrsquos estate may be challenged by the bankruptcy manager The transactionsof the said type entered into within one month before filing the petition or after filing the petition may bechallenged


The state of distress normally implies that the company is not able to fulfill its obligationsConsequently the director must file a petition for bankruptcy In case of the failure to file such petitionthe director will bear contributory liability for trading while in distress

In the most serious cases a director may face criminal liability Under the Criminal Code a director maybe held criminally liable for

(i) Fraudulent actions aimed at concealment of the assets of the debtor

280

(ii) Intentional bankruptcy (when the director intentionally takes such business actions which ultimatelyresult in the bankruptcy of the debtor)

(iii) Sham bankruptcy (when the director intentionally makes public believe that a company isinsolvent)

The liability for the following crimes may vary from criminal fine to imprisonment

2 Taking action


Bankruptcy proceedings may take two forms

(i) ldquoStandardrdquo bankruptcy proceedings Standard bankruptcy proceedings may involve four separateprocedures ndash supervision procedure financial sanation procedure external management procedureliquidation procedure

i Supervision is a mandatory procedure which must be followed at all times to start bankruptcyproceedings At the supervision the bankruptcy manager accumulates information concerning financialstatus of the debtor The supervision stage is terminated upon the convocation of the first meeting of thecreditors At the first meeting of the creditors the creditors may decide to introduce the financialsanation or external management procedure (which are not mandatory) or directly proceed to theliquidation procedure

Financial sanation procedure may be introduced by the decision of the creditors approved by the courtAt the financial sanation stage a debtor presents a scheme of repayment of the debts This scheme mustbe approved by the meeting of the creditors If the debtor succeeds in repaying its debts then thebankruptcy proceedings are terminated However the creditors may choose to introduce externalmanagement procedure or may directly proceed to the liquidation of the company

External management procedure may be introduced on the motion of the creditors meeting subject to theapproval by the court At the external management stage the bankruptcy manager takes actions aimed atimproving of the debtorrsquos financial state Such actions may include change of the business activity of thecompany partial sale of the debtorrsquos assets and other measures

Liquidation procedure is the ultimate stage of the bankruptcy proceedings at which the assets of thedebtor are distributed among the creditors on the pro rata basis

(ii) ldquoSimplifiedrdquo bankruptcy proceedings The simplified bankruptcy proceedings may be initiatedwhen the actual location of the debtor cannot be established or the debtor ceased its commercialactivity Under the simplified bankruptcy proceedings such procedures as supervision financial sanationexternal management are skipped The only procedure to be followed under the simplified bankruptcyproceedings is the liquidation procedure


The creditor(s) and the debtor may come to an amicable agreement at any stage of the bankruptcyproceedings The conclusion of the settlement agreement terminates bankruptcy proceedings Thesettlement agreement is subject to the courtrsquos approval and for this reason such procedure cannot bedeemed as entirely informal

281


As the primary purpose of all bankruptcy proceedings is to achieve the balance of interest between thecreditors and the debtor none of the procedures grants any particular advantage to the creditor or to thedebtor


The insolvency proceedings may be initiated both by the creditor and the debtor

(i) The initiation of the bankruptcy proceedings by the creditor is possible if

a the debt exceeds 100000 Russian Roubles (3200 Euro approximately) with regard to legal entities2The insolvency proceedings may be initiated only if the indebtedness is confirmed by a court decision

b the above debt is past due over three months

(ii) The debtor is obliged to file petition if it is unable to fulfill all outstanding obligations or hisoverall indebtedness exceeds 100000 Russian Roubles and in other cases of financial distress providedin the Federal Law ldquoOn Insolvency (Bankruptcy)rdquo (the ldquoBankruptcy Lawrdquo)


Petition for bankruptcy must be filed with state arbitrazh (commercial) court at the domicile of thedebtor Documents evidencing the indebtedness of the company or its inability to fulfill its obligationsmust be annexed to the petition Exhaustive list of the documents to be annexed to the bankruptcy petitionis set forth in the Bankruptcy Law


Please see comment 24 above


The level involvement of the court is very high the court approves the bankruptcy manager approvesthe introduction of each bankruptcy procedure sets the time frames for bankruptcy proceedings gives itsconsent for the creditors to be entered into the creditors register approves settlement agreement


The insolvency proceedings must be completed within 13-18 month from filing the petition However inpractice it takes about 2 years to complete bankruptcy proceedings And some complex procedures maylast up to 5 years and longer


Bankruptcy manager has to post a notification concerning the bankruptcy of the debtor within ten daysfrom the date of the judgment which confirms the insolvency of the debtor


The debtor enjoys the following benefits

(i) The creditors may enforce their claims to the debtor only by means of entering into the register of thecreditors

282

(ii) Moratorium on enforcement of all court decisions against the debtor ie the enforcement of the courtdecisions against the debtor is suspended


As we believe the ldquofinancial sanation procedurerdquo to some extent resembles ldquodebtor in possessionprocessrdquo However there may exist some special features of the ldquodebtor in possessionrdquo process underthe US law that we are not aware of


Please see p82 QA concerning recognition and enforcement of foreign awards


We believe that influence of political factors on the bankruptcy proceedings is minimal however somefactors of public policy may come into play It is important to mention that ldquoThe Bankruptcy Lawrdquoestablishes its own regime for bankruptcy proceedings of township forming enterprises and agriculturalenterprises The bankruptcy proceedings of the company involved in the business activity protectedunder the Federal Law ldquoOn official secretrdquo will be conducted under the supervision of the competentstate authorities

3 Creditor issues


An unsecured creditor included in the register of creditors obtains a right to pro rata distribution of thedebtorrsquos assets according to its share in the overall indebtedness of the debtor As the debtor is in thestate of bankruptcy this fact normally implies that the assets of the debtor are insufficient to cover theentire indebtedness Typically only a small proportion of the debtorrsquos property remains after thesettlement of the debts of the first two ranks of creditors

Secured creditors are in a better position as they will recover 70 of the proceeds from sale of thesecured asset (please see 32 below)3


The creditor may enforce its security by means of foreclosure In case of the foreclosure the creditorwill recover 70 of the asset value 30 will be used to cover the claims of the creditors of the firstand the second rank priority as well as the court and bankruptcy manager expenses


The set off is not allowed if such set off establishes the priority of one creditor over the other creditors


There is no difference between the inter-company debts and debts from the other creditors


Subsidiary liability may be imposed on the ldquocontrolling personsrdquo of the company The term

283

ldquocontrollingrdquo refers to all persons (both physical and legal) whose actions or omissions of actionsresulted in the bankruptcy of the company The term ldquocontrolling personrdquo also includes such personswho control the business activity of the company or who could give mandatory instructions to themanagement of the company or the person who controlled more than 50 of the issued stock of thecompany The prescription period for holding controlling person subsidiary liable is 2 years from thetime of filing the petition for bankruptcy

The creditors may form two types of bodies to manage the bankruptcy proceedings

(i) General Meeting of the Creditors The general meeting of the creditors shall be established at alltimes All creditors enlisted in the register of creditors may be present at general meeting of thecreditors The number of votes one creditor may have depends on its share in the total indebtedness ofthe creditor The decisions of the general meeting of the creditors are taken by the simple majority ofvotes The competence of the general meeting of the creditors includes the following matters formationof the creditors committee appointment of the bankruptcy manager remuneration of the bankruptcymanager initiation of financial sanation external management and liquidation procedures approval ofthe settlement agreement and other matters

(ii) Creditors Committee Creditors Committee is formed by the General Meeting of the Creditors Theformation of the Creditors Committee is not obligatory if the number of the creditors does not exceed 50persons Each member of the creditors committee has one vote Members of the creditors committee areelected on the proportional basis The number of the members of the creditors committee shall be noless than 3 but no more than 11 persons (only individuals) The competence of the creditors committeeincludes the following issues requesting information from the debtor concerning its financial statusfiling a complaint against the bankruptcy manager convocation of the general creditors meeting andother powers listed in the Bankruptcy Law If the creditors committee is not established then the generalmeeting of the creditors exercises all the said powers



The control of the company depends on the stage of bankruptcy proceedings

(i) Under the Supervision and Financial Sanation procedure the governing bodies of the company retaintheir control over the company Some transactions (alienation of 20 of the assets of the debtor etc) aresubject to the written approval by the bankruptcy manager

(ii) If the general director of the debtor fails to comply with the provisions of the Bankruptcy law thebankruptcy manager may file a petition to dismiss the director and appoint new director

(iii) Under the External Management procedure and Liquidation procedure the company is controlled bythe bankruptcy manager appointed by the court who takes the control over all the business activities andaffairs of the company


All expenses incurred during the bankruptcy proceedings are indemnified by the debtor These expenseshave priority over the claims of the bankruptcy creditors However under simplified bankruptcyproceedings the initiating creditor has to issue a letter stating that the creditor agrees to finance all the

284

expenses relating to the simplified bankruptcy proceedings


Financing of the creditor may be organised under Supervision Financial Sanation External ManagementProcedures However the lender does not enjoy any preference with regard to the other creditors as allcreditors are treated equally in accordance with their rank (see 53 above)


All the claims of the employees concerning their salaries and severance payments fall into to the secondrank of priority of the creditors However if the funds of the debtor are insufficient to cover all theclaims of the employees the funds are distributed pro rata among them and the obligations of the debtorare discharged


The bankruptcy manager has a right to terminate contracts under performance (this option is available atthe external management stage and not available at any other stage of bankruptcy) If the contract isalready performed the bankruptcy manager can not exercise such right unless the contract falls within thecategory of ldquosuspiciousrdquo transactions or other transactions of the same nature



The creditor shall provide the court the debtor the bankruptcy manager with the documents evidencingthe indebtedness and substantiating his claim The creditor may be added to the register of the creditorsonly with the permission of the court


All claims shall be filed within 30 days starting from the publication of the notification concerning theinsolvency proceedings (Please see 29 above)


Under the Russian Law there exist three ranks of claims (creditors) However court expenses andbankruptcy manager expenses have priority over the claims of all three ranks of creditors

(i) The first rank ndash claims connected with body injuries other injures to health

(ii) The second rank - claims of the employees regarding their salaries and severance paymentsRoyalties to the authors of the pieces of intellectual property are included in the second rank ofcreditors

(iii) The third rank ndash claims of the other creditors including the claims secured by pledgemortgage

The claims of the creditors will be satisfied in the following manner The property will be primarilydistributed among the first rank creditors on pro rata basis If any property is left then it will bedistributed among the second rank creditors The remainder will be distributed among third rankcreditors

285



There exists no such procedure


(i) Under Financial Sanation and External Management procedures bankruptcy proceedings areterminated if the debtor regained its ability to repay its debts

(ii) Under the Liquidation Procedure the bankruptcy manager shall provide the report to the court uponthe expiration of the insolvency proceedings period set forth by the court Upon the provision of thereport the court closes the bankruptcy proceedings and forwards the notice to the Federal Registrar ofLegal Entities on the liquidation of the debtor (within 30-60 days)

(iii) Amicable settlement approved by the court terminates insolvency proceedings at any stage


As it was mentioned in p 53 of the Questionnaire there exist three ranks of creditors under the RussianLaw The first two ranks (persons with body injuries and former employees of the debtor) are in a morefavourable position as they are more likely to recover proceeds from the sale of the debtorrsquos estate



No


If the actual location of the debtor can not be identified or the debtor ceased its commercial activity thenthe procedure of simplified bankruptcy will apply In case of the simplified bankruptcy the supervisionfinancial sanation external management stages are skipped



Under the conflict of laws provisions of the Civil Code the bankruptcy matters are governed by the lawsof the state of incorporation of the debtor Subsequently the bankruptcy proceedings of the Russian entitywill be governed by the ldquoBankruptcy lawrdquo whereas the bankruptcy proceedings with respect to theforeign company will be governed by the laws of the state of incorporation of that foreign entityHowever this does not preclude the foreign creditor from participation in the bankruptcy proceedings ofthe Russian legal entity

286


It is important to indicate the difference between the bankruptcy proceedings against Russian and foreignlegal entities

(i) Russian legal entities The bankruptcy matters are under the special jurisdiction of the state arbitrazh(commercial) courts The term ldquospecial jurisdictionrdquo implies that only state arbitrazh (commercial)courts are competent to hear the bankruptcy disputes with regard to Russian legal entities Subsequentlybankruptcy proceedings against Russian legal entities may be initiated only by filing a petition within thestate arbitrazh court The bankruptcy proceedings against Russian legal entity can not be initiated in anycourt of any other jurisdiction Still if such proceedings against a Russian entity are initiated suchbankruptcy awards will not be enforced in Russia

In the YUKOS Case (А40-301605-132-33) the debtor (YUKOS Oil company) filed a petition forbankruptcy within the Texas district court and sought injunction restraining all actions with respect to theYUKOS assets Then YUKOS attempted to enforce the Texas court decision in Russia Ninth AppellateCourt (Russia) refused to recognize and enforce the decision of the Texas Court The Ninth AppellateCourt stated that YUKOS is a company incorporated under the laws of Russia subsequently it is subjectto the Russian Bankruptcy Act and exclusive jurisdiction of the Russian state arbitrazh (commercial)courts

(ii) Foreign legal entities Under the Bankruptcy law and Arbitrazh Procedural Code foreign judgmentson bankruptcy matters can be recognized and enforced in Russia on the basis of an international treaty Inabsence of a specific treaty the foreign award on bankruptcy may be recognized and enforced on thebasis of the reciprocity principle

a To our best knowledge the Russian Federation is not a signatory to any international treaty governingbankruptcy matters So it is hardly possible to enforce foreign award on bankruptcy in the RussianFederation

b It is important to mention that under the case law of state arbitrazh (commercial) courts foreign legalproceedings against foreign legal entities have no effect within the territory of the Russian Federation

c In the Case N А40-290508-62-3 the US mother company owned stock of shares in the charter capitalof the Russian legal entity Then the mother company filed petition for bankruptcy under the Delawarelaw and passed the title to shares to its US creditor The US creditor filed a petition to the registrar ofthe Russian company in order to enter into the register as a new holder of the said shares The Registrarrefused to take the requested action The state arbitrazh court supported the registrar stating that theforeign court decision (the decision of the Delaware court) may be enforced only on the basis of aninternational treaty In absence of the international treaty the foreign court decision has no legal effectwithin the territory of the Russian Federation As the Russian court did not recognize the US courtdecision the title to the said shares was not transferred

287

Serbia

Igor Živkovski Attorney at Law Živkоvić Sаmаrdžić Law Office

wwwzslawrs email igorzivkovskizslawrs tel +381 11 2636 636



There are few ways how creditor might take security over assets Some of those are

1 Pledge

2 Mortgage


Bankruptcy debtor may take legal transactions and other actions before the opening of the bankruptcyproceedings that are interfering with equal settlement of bankruptcy creditors or damaging the creditorsas well as transactions and actions putting some creditors in a more favorable position over the othersIn this case bankruptcy administrator may contest these actions by lawsuit filing Any securities givenfor loans to associated persons with bankruptcy debtor may also be invalid if they are created withinone year of the bankruptcy opening or in period of longer insolvency


A director shall be liable to a company for any damage heshe causes to it by violating the provisions ofSerbian Law on Companies the Articles of Association or a decision of the General Meeting

Notwithstanding the foregoing a director shall not be liable for damage if heshe acted in accordancewith a decision of the General Meeting

If the damage referred to in paragraph 1 of this answer occurs as a result of a decision of the Board ofDirectors all directors who voted in favour of such decision shall be liable for the damage

In cases referred to in paragraph 4 of this answer any director who abstained from voting shall bedeemed to have cast an affirmative vote for the purposes of establishing liability for damage

In cases referred to in paragraph 4 of this answer any director did not attend a meeting in which theBoard of Directors passed the decision in question and did not vote in favour of such decision by othermeans shall be deemed to have cast an affirmative vote for the purposes of establishing liability fordamage unless heshe opposed the decision in writing within eight days of learning of its passing

A companyrsquos damage claims in accordance with this answer shall be time-barred after three years ofoccurrence of damage

A company may not waive a damage claim except by a decision of the General Meeting passed by athree-quarters majority of the voting power present subject to an understanding that such decision may

288

not be passed if it is opposed by shareholders holding or representing minimum 10 of a companyrsquosshare capital

2 Taking action


Available procedure for the company is reorganization Reorganization shall be conducted if thisensures more favorable settlement of creditors in relation to compulsory liquidation and especially ifeconomically justifiable reasons exist for the continuation of the debtors business

Reorganization shall be conducted in accordance with the plan of reorganization that shall be preparedin writing

The plan of reorganization may be filed concurrently with the petition for bankruptcy or after the openingof bankruptcy in accordance with this Law

If the plan of reorganization is filed concurrently with the petition for bankruptcy it shall be referred toas a prepackaged plan of reorganization


NA


Both creditor-friendlydebtor-friendly procedure is reorganization


Some of triggers for insolvency are companyrsquos inability to pay its debts within 45 days of the date theybecome due complete cease of all payments for a consecutive period of 30 days if company makes itapparent that it will not be able to pay its debts as they become due if if the liabilities of the companyexceed its assets


The bankruptcy proceedings shall be initiated by the petition of the creditor the bankruptcy debtor orthe liquidator

The creditor may initiate a bankruptcy proceeding in case of permanent insolvency of the debtor ornoncompliance with the adopted plan of reorganisation or in case the plan of reorganisation entered intoeffect in a fraudulent or unlawful manner

The bankruptcy debtor shall file the petition for bankruptcy if one of the grounds referred to in Article11(2) of Serbian Bankruptcy Law exists

The liquidator shall file the petition for bankruptcy in cases prescribed by legislation governing thelegal status of companies

The petition to open bankruptcy proceedings shall be filed with the appropriate court

289

The bankruptcy judge shall render a decision initiating the preliminary bankruptcy proceeding withinthree days from the day of the receipt of the petition for bankruptcy The preliminary proceedings areinitiated for the purpose of determining the existence of grounds for the opening of the bankruptcyproceeding

The decision initiating the preliminary bankruptcy proceeding may not be appealed

The bankruptcy judge shall decide to open the bankruptcy proceeding without the preliminaryproceeding if

1 The bankruptcy debtor submits the petition for initiating the bankruptcy proceeding accompanied withall required documents

2 The bankruptcy creditor submits the petition for initiating the bankruptcy proceedings and thebankruptcy debtor admits to the existence of the reasons for bankruptcy

3There is a presumption of permanent insolvency as defined in Article 12 of Serbian Bankruptcy Lawexists


Company can be placed into insolvency proceedings by initiating the petition of the creditor thebankruptcy debtor or the liquidator


A bankruptcy proceeding is conducted by the competent court according to the location of debtor Thebankruptcy judge shall

1 Rule on the initiation of preliminary bankruptcy proceedings

2 Establish grounds for bankruptcy and rule on opening of bankruptcy proceedings

3) Appoint and dismiss the bankruptcy administrator 4) Approve bankruptcy proceedings expenses andliabilities of the bankruptcy estate before they are paid

5) Determine the preliminary and final award and reimbursement of expenses of the bankruptcyadministrator

6) Rule on complaints against actions taken by the bankruptcy administrator

7) Consider the draft plan of reorganisation of the bankruptcy debtor and hold the hearing to consider thedraft plan of reorganisation or reject the draft plan of reorganisation

8) Confirm the adoption of the reorganisation plan or note that the plan has not been adopted

9) Render the decision on final distribution of the bankruptcy estate


It depends sometimes it takes few years


290

The bankruptcy administrator may take actions that have a significant impact on the bankruptcy estatesuch as obtaining credit raising a loan acquiring high value equipment and the like (hereinafter actionsof special importance) after having notified the bankruptcy judge thereof and having obtained theconsent of the creditors committee

The act of contesting bankruptcy debtors legal transactions by filing claims or otherwise shall not bedeemed an action of special importance

Bankruptcy creditors shall be given notice of the creditors assembly meetings and agendas by publicannouncements on the courts bulletin board and by advertisements in two high circulation dailynewspapers distributed on the entire territory of the Republic of Serbia unless the creditors assemblydecides otherwise

Lien creditors are bound to the deadline for submitting claims inform the court about the pledge overtheir claims against debtor which is not bankruptcy debtor but the third person

The authorized persons of the bankruptcy debtor attorneys and the persons who perform the financialduties and audits for the bankruptcy debtor shall provide the bankruptcy judge and the bankruptcyadministrator as required and without delay with all necessary data or information

A creditor who has filed the claim in the bankruptcy proceedings is obliged to report in claim if thereare guarantors of the obligation of the debtor as well as about the report claims promptly notify theguarantors

Bankruptcy administrator shall inform the excluding creditor whether heshe will honour or refuse therequest within the time period of 20 days from its receipt and shall specify the deadline within whichthe request shall be honored


During the financial restructuring is an introduced inaction debt that has legal effect on the conclusion ofa debt standstill

Agreement on the debt standstill is the basis for the suspension of the execution of the forced paymentfrom the account of the company in accordance of the claims of creditors who concluded contract aswell as the ban on filing and a stay of execution that was filed in the motion of the enforcement creditorwho concluded the contract

In the dormant period debt creditors who have concluded an agreement on debt standstill may not takeany actions to collect claims apart from submitting claims for payment of claims in order to prevent theoccurrence of obsolescence of its claims


NA


NA


NA

291

3 Creditor issues


Bankruptcy proceeding is a legal mechanism for the collective enforcement of the claims of the entirepayout row of unsecured creditors This collective mechanism sets instead of individual creditors rightsto initiate enforcement proceedings when debtor is unable to settle its liabilities The bankruptcyprocedure is regulated process that ensures fair and equal treatment of all creditors Creditors areclassified according to the bankruptcy proceedings in certain the extent to a higher payment priority(certain amounts of wages as well as the amounts claimed by funds insurance and tax authorities) aswell as general payout row of unsecured creditors


Creditors holding a security right a statutory right of retention or a right to satisfy their claims fromassets or rights registered in public registers or books shall be entitled to priority in distribution of theproceeds from the realization of such assets securing their right

The creditors referred to in paragraph (1) of this Article shall not be deemed bankruptcy creditors If thevalue of their claim is higher than the amount obtained from realizing a secured asset or right they shallsatisfy the remaining part of their claim as bankruptcy creditors

Secured claims acquired through enforcement proceedings or creating of a charge within 60 days beforethe date of opening the bankruptcy proceedings for the purpose of enforcement or security shall cease tobe valid such creditors shall not be deemed secured creditors Based on the decision of the bankruptcyjudge the authorized authority keeping the appropriate public books shall strike such security rights offthe books

There is also pledgee Pledgee hold a security right a statutory right of retention or a right to satisfytheir claims from assets or rights registered in public registers or books but the pledgee does not have aclaim against the bankruptcy debtor Furthermore the pledgee is not a secured creditor nor a bankruptcycreditor thus he cannot be appointed to the creditorsrsquo assembly and the creditors committee


Right to Offset Claims in Bankruptcy

If a creditor has acquired the right to offset his claim against the debtor with the debtors claim againstsuch creditor before the petition to open bankruptcy proceedings was filed the opening of bankruptcyproceedings shall not constitute grounds for the loss of the right to offset such claim The creditor shallbe obliged to file its claim and a statement of offset with the court before the expiry of the deadline forfiling claims otherwise it shall lose the right to offset

Exceptionally in case of rights and obligations arising from one or more financial contracts to which abankruptcy debtor is a party and which were concluded based on a framework contract between thesame parties in the period before the filing for bankruptcy the right to offset (netting) shall exist onlywith respect to such mutual rights and obligations and if the creditor has acquired in accordance withsuch framework contract the right to offset after the filing for bankruptcy was made but no later than atthe opening of bankruptcy proceeding by automatism or by way of notifying thereof the bankruptcydebtor no later than three days of the opening of bankruptcy on the grounds of the existence of reasonsfor bankruptcy the filing of the petition for bankruptcy or on the grounds of opening of bankruptcy

292

proceeding

Financial contract shall be deemed to be a contract setting the obligation of one or both parties thereto tomake a payment or deliver a specified commodity which has as its subject the transactions in financialderivatives such as swaps options futures forwards and other unnamed derivatives a repo transactionor securities lending and which is concluded in writing or orally provided that there is a written recordof the terms of such an oral financial contract in accordance with normal business practice for theconclusion of such contracts

Cases where Offsetting is not Permitted

Offsetting shall not be permitted if

1) The claim was ceded to the bankruptcy creditor within a period of six months before the petition toopen bankruptcy was filed and the creditor knew or ought to have known that the debtor is insolvent orover indebted

2) The creditor acquired the right to offset through a voidable transaction Exceptionally to paragraph1st of this answer offsetting shall be allowed if the claim in question was ceded in relation tofulfillment of unfulfilled contracts or was restored its legal effect by the successful voiding of a legaltransaction or other action of the bankruptcy debtor


NA


No


Yes and the creditors committee shall

1) Give its opinion to the bankruptcy administrator on the manner of selling the property if the propertyis not to be sold by public auction and give its consent on actions of special importance in accordancewith this Law

2) Give its opinion on continuation of the bankruptcy debtors business operations

3) Review reports of the bankruptcy administrator on the course of bankruptcy proceedings and the stateof bankruptcy estate

4) Approve the final account of the bankruptcy debtor

5) Review and require at own cost the delivery of copies of complete documentation

6) Inform the creditors assembly of its work if requested

7) Perform other activities stipulated in this Law


293


The bankruptcy administrator shall manage the business of and represent the bankruptcy debtor exceptwhere this Law provides otherwise

The bankruptcy administrator as well as persons performing activities of a bankruptcy administrator onbehalf of the organization established under a separate law to act as a bankruptcy administrator shallenjoy the status of an official within the meaning of the Criminal Code provisions governing the officialstatus


The financing is done primarily by selling property of bankruptcy debtor


NA


Creditorrsquo Committee

Creditors who are at the same time the employees of former employees of the bankruptcy debtor may nothave more than one of their representatives elected to the creditorsrsquo committee

Rank of Bankruptcy Claim

Satisfaction Bankruptcy creditors depending on their claims shall be classified into ranks Thebankruptcy creditors of lower rank can only be satisfied after the creditors of higher rank The first rankof claims shall comprise unpaid net salaries of employees and former employees in the amount of theyearly minimum wage for the year before the opening of bankruptcy with interest from due date to thedate of opening of bankruptcy and unpaid contributions for pension and disability insurance for twoyears before the opening of bankruptcy calculated using as a basis the minimum monthly contributionbase in accordance with regulations on compulsory social insurance contributions as at the day ofopening of bankruptcy as well as claims arising from contracts with companies which subject areunpaid contributions for pension and disability insurance for two years before the opening ofbankruptcy calculated using as a basis the minimum monthly contribution base in accordance withregulations on compulsory social insurance contributions as at the day of opening of bankruptcy

Liabilities of the Bankruptcy Estate

One of four liabilities of the bankruptcy estate is the liability towards the debtorrsquos employees arisingafter the opening of bankruptcy


If the debtor and its counterpart did not before the opening of bankruptcy fulfill obligations arising froma mutually binding contract in its entirety the bankruptcy administrator may on behalf of the debtorexecute the contract and demand from the other party to fulfill its obligations

If the bankruptcy administrator does not accept the fulfillment of the contract the other party may pursuehisher claim as a bankruptcy creditor

If the other party to the contract invites the bankruptcy administrator to state its position on fulfilling the

294

contract the bankruptcy administrator shall be obliged to inform the other party in writing within 15days of the receipt of such invitation of whether he intends to fulfill the contract

If the bankruptcy administrator upholds the contract but ceases fulfillment in the course of the bankruptcyproceeding any claims arising from the contract shall be considered a liability of the bankruptcy estate

Provisions of this Article shall apply to all bilaterally binding contracts unless other conditions forcertain contracts are prescribed by the Law of Bankruptcy



Creditors shall file their claims in writing with the bankruptcy court The Law on Bankruptcy prescribesmandatory elements of the claims


Submissions may be filed upon the expiry of the term set by the decision of the bankruptcy judge but notlater than 120 days from the day of publishing the announcement in the Official Gazette of the Republicof Serbia Any claims filed after the expiry of the period of 120 days shall be rejected as untimely


Upon the settlement of such expenses the costs of the bankruptcy estate shall be settled

Bankruptcy creditors depending on their claims shall be classified into ranks The bankruptcy creditorsof lower rank can only be satisfied after the creditors of higher rank Bankruptcy creditors of the samerank shall be satisfied in proportion to the amount of their claim

The rank of bankruptcy claims shall be as follows

The first rank of claims shall comprise unpaid net salaries of employees and former employees in theamount of the yearly minimum wage for the year before the opening of bankruptcy with interest from duedate to the date of opening of bankruptcy and unpaid contributions for pension and disability insurancefor two years before the opening of bankruptcy calculated using as a basis the minimum monthlycontribution base in accordance with regulations on compulsory social insurance contributions as at theday of opening of bankruptcy as well as claims arising from contracts with companies which subject areunpaid contributions for pension and disability insurance for two years before the opening ofbankruptcy calculated using as a basis the minimum monthly contribution base in accordance withregulations on compulsory social insurance contributions as at the day of opening of bankruptcy

The second rank shall comprise all public revenue claims that have become due over the last threemonths before the opening of bankruptcy except pension and disability insurance contributions foremployees

The third rank shall comprise claims of other bankruptcy creditors

The fourth rank shall compromise claims created two years before the day of opening bankruptcy whichare based on loans as well as other legal actions that in terms of economy correspond to loans approvalin part in which these loans are not secured but approved to the bankruptcy debtor by entities associated

295

with bankruptcy debtor in terms of the Law on Bankruptcy except those entities who are engaged inapproving credits and loans within its registered activity

Claims of bankruptcy creditors who agreed before the opening of the bankruptcy to be settled onlyafter the full settlement of claims of one or more bankruptcy creditors shall be settled only after the fullsettlement of the third payment rank and the full settlement of interest of creditors whose claims havebeen settled


NA



NA


At the final hearing the bankruptcy judge shall render a decision concluding the bankruptcy proceedings


The outlooks for all classes of creditors are primarily reflected in the value of assets of the bankruptcydebtor then the size of the property as well as the number of interested buyers An additional problemis the burden of the property secured right in other words the secured creditors and excretory havepriority in the collection Upon the settlement of the costs of the bankruptcy proceedings the rewardsand benefits than obligations of the bankruptcy administrator and obligations of the bankruptcy estate itcan begin with the payment of all classes of creditors



NA


NA



NA


296

The answers regarding this question you may find in relevant articles of section XII lsquorsquoCross-BorderBankruptcyrsquorsquo (The Law on Bankruptcy Official Gazette of the Republic of Serbia No 1042009992011 712012 832014)

Relevant Law

The law of the State where the proceedings were initiated shall govern the bankruptcy proceedingsunless otherwise stipulated herewith

In case of recognition of foreign proceeding under the Law on Bankruptcy the laws of the Republic ofSerbia shall apply to assets subject to excluding rights or secured assets located in the territory of theRepublic of Serbia

The law governing labor contracts shall apply to effects of bankruptcy proceedings on labor contracts

In Rem Jurisdiction for Recognition of Foreign Proceeding and Cooperation

Recognition of foreign proceedings and cooperation with foreign courts and other appropriate bodiesshall be performed by the court referred to in Article 15(1) of the Law on Bankruptcy in accordancewith the law (It is the Commercial Court)

Public Policy Exception

The appropriate court may refuse to take an action concerning a cross border bankruptcy case if theaction would be contrary to the public policy of the Republic of Serbia

Interpretation

In applying the provisions on cross border bankruptcy the appropriate court shall especially take intoaccount their cross border character and the need to promote uniformity in their application in goodfaith

Right of Direct Access

A foreign representative shall be entitled to apply directly to a court in the Republic of Serbia

When taking actions referred to in paragraph (1) of this Article by filing appropriate request orotherwise a foreign representative shall be required to submit the following for purposes of proving hisstatus

1) The decision opening the foreign proceeding and appointing the foreign representative either originalor a certified copy or transcription thereof translated into the language in official use at the appropriatecourt in the Republic of Serbia accompanied by proof of its enforceability under the applicable foreignlaw

2) A certificate issued by the foreign court or other appropriate body affirming the existence of theforeign proceeding and of the appointment of the foreign representative

3) In the absence of proof referred to in subparagraphs 1) and 2) of this paragraph any other proof of theexistence of the foreign proceeding and of the appointment of the foreign representative acceptable to theappropriate court in the Republic of Serbia

Jurisdiction in Case of Application by a Foreign Representative

297

An application filed with the appropriate court in the Republic of Serbia by a foreign representativepursuant to the Law on Bankruptcy shall establish jurisdiction of such court solely in the matter of theapplication

Application by a Foreign Representative to Commence a Proceeding under the Law on Bankruptcy

A foreign representative shall be entitled to apply to commence a bankruptcy proceeding if conditionshave been met to commence such a proceeding under the Law on Bankruptcy

Participation of a Foreign Representative in a Proceeding under this Law

Upon recognition of a foreign proceeding the foreign representative shall be entitled to participate in aproceeding regarding the debtor under the Law on Bankruptcy

Application for Recognition of a Foreign Proceeding

A foreign representative may apply to the appropriate court in the Republic of Serbia for recognition ofthe foreign proceeding in which the foreign representative has been appointed whereby the foreignrepresentative shall be required to prove his status as referred to in Article 182(2) of the Law onBankruptcy (In this paper section lsquorsquoRight of Direct Accessrsquorsquo)

An application for recognition shall be accompanied by a statement made by the foreign representativeidentifying all foreign proceedings in respect of the debtor that are known to the foreign representativetranslated into the language in official use at the appropriate court in the Republic of Serbia

Legal Effects of Recognition of a Foreign Main Proceeding

The consequences of recognition of a foreign main proceeding shall be as follows

1) Prohibition of initiating new or stay of continuation of proceedings concerning the debtors assetsrights obligations or liabilities

2) Prohibition on compulsory executions against the debtors assets and

3) Prohibition on transferring encumbering or in any way disposing of the debtors assets

The court may allow for exemptions from application of consequences referred to in paragraph (1) ofthis Article only in cases provided for by the Law on Bankruptcy for exemption of application ofconsequences of opening of bankruptcy as well as where it establishes that foreign main proceedingdoes not provide adequate protection of interests of creditors in the Republic of Serbia

The prohibition or stay referred to in paragraph 1(1) of this Article shall not affect the right tocommence individual actions or proceedings to the extent necessary to preserve a claim against thedebtor

The prohibitions referred to in paragraph (1) of this Article shall not affect the right to request thecommencement of a bankruptcy proceeding in the Republic of Serbia or the right to file claims in such aproceeding

Contesting Legal Transactions of Bankruptcy Debtor

Upon recognition of a foreign proceeding the foreign representative may contest legal transactions ofthe debtor in accordance with regulations on the contestation of legal transactions of the bankruptcy

298

debtor

In case of a foreign non-main proceeding the court shall be required to establish that contestation relatesto assets that under the Law on Bankruptcy should be administered in the foreign non-main proceeding

Intervention by a Foreign Representative in Proceedings in the Republic of Serbia

Upon recognition of a foreign proceeding the foreign representative may in accordance with the lawintervene in any proceedings in which the debtor is a party

The authority of a foreign representative shall be a preliminary issue in the proceeding referred to inparagraph (1) of this Article

Forms of Cooperation

The Cooperation and Direct Communication between Courts of the Republic of SerbiaBankruptcyAdministrator and Foreign Courts or Other Appropriate Bodies or Foreign Representatives may beimplemented by any appropriate means and in particular by

1) Appointment of a person or body to act at the direction of the court

2) Exchange of information by any means considered appropriate by the court

3) Coordination of the administration and supervision of the debtors assets and affairs

4) Approval or implementation by courts of agreements concerning the coordination of proceedings

5) Coordination of concurrent proceedings regarding the same debtor

Opening of a Bankruptcy Proceeding after Recognition of a Foreign Main Proceeding

After recognition of a foreign main proceeding a bankruptcy proceeding may be opened only if thedebtor has assets in the Republic of Serbia

Presumption of Grounds for Bankruptcy Based on Recognition of Foreign Main Proceeding

In the absence of evidence to the contrary the existence of grounds for bankruptcy shall be presumed if afinal decision exists on the recognition of foreign main proceeding against the bankruptcy debtor Thecourt shall not open bankruptcy proceeding if the debtor is able to prove that no grounds for bankruptcyreferred to in Article 11 of the Law on Bankruptcy exist (Article 11 provides the grounds forbankruptcy)

The information in this document is not intended to provide and does not constitute legal or anyother advice on any particular matter and is provided for general information purposes only

299

Singapore

Mark Yeo Director Engelin Teh Practice LLC

wwwetplawcom email markyeoetplawcom tel +65 6224 9933



Pledge ndash The existence of the security depends on possession of the asset being granted to the securityholder

Lien ndash Generally the existence of the security depends on possession of the asset being granted to thesecurity holder but can arise out of operation of law in certain circumstances

Charge ndash This is a creation of contract that generally does not transfer title to the security holder

Mortgage ndash This usually involves a conveyance or assignment of legal title in property subject to anequity of redemption A mortgage is treated as a charge for the purposes of the Companies Act (Cap50)

Charges on assets of companies incorporated in Singapore would require registration with ACRAotherwise the said charges are void against a liquidator or unsecured creditors in the event of a windingup of the said company


In the event of a winding up of a company and in relation to transactions entered into within a specifiedperiod prior to the commencement of the winding up the said transactions may be (subject to fulfillmentof certain conditions) void or voidable-

bull Where the transfer of property amounts to an undue preference

bull Where the transfer of property was done at an undervalue andor

bull Where fraud was involved

Any dispositions of the property of the company after the commencement of a winding up is void unlessthe court otherwise orders

Where a company goes into liquidation within 6 months from the creation of a floating charge thatcharge is invalid except to cover the amount of cash advanced to the company at the time of creation orsubsequently together with interest at 5 per annum - unless it is proved that the company was solventimmediately after the creation of the floating charge

If any charge that requires registration under the Companies Act (Cap 50) is not registered within theprescribed period or such extended period as the court may allow that charge is void against aliquidator or any unsecured creditor on the application for a winding up order against the said company

300


If a debt is contracted on behalf of a company and at the time that the debt was contracted the directorresponsible for doing so had no reasonable or probable expectation that the company would be able topay the debt that director may be-

bull Convicted of an offence and liable on conviction to a fine not exceeding S$2000 or to imprisonment ofnot more than 3 months and

bull Personally responsible without any limitation of liability for payment of the whole or any part of thesaid debt

If the business of a company has been carried out to defraud creditors or for a fraudulent purpose thedirector who knowingly played a part in the carrying out of business in that manner may by declarationof the court be personally responsible without any limitation of liability for all or any of the debts orother liabilities of the company as the court directs

2 Taking action


The main procedures are as follows-

Winding up ndash This is where a liquidator is appointed to realize the assets of the company and to pay offthe creditors of the company This leads to dissolution of the company

Judicial management (Section 227A of the Companies Act Cap 50) ndash where a judicial manager isappointed by the court with a view to achieve one or more of the following purposes-

bull The survival of the company or the whole or part of its undertaking as a going concern

bull The approval under Section 210 of the Companies Act (Cap 50) of a compromise or arrangementbetween the company and creditors andor

bull The more advantageous realization of the assets of the company compared to when the company iswound up

Scheme of arrangement (Section 210 of the Companies Act Cap 50) ndash where a scheme is proposed bythe company to rearrange the rights of creditors and members If the scheme is approved by the requisitemajority the scheme becomes binding on all creditors and members of the company subject toconfirmation and sanction by

the court


No specific informal procedures

It is open to the company to negotiate with its creditors on a case by case basis to compromise any debtsowed to those creditors


301

This will largely depends on the perspective of the creditor debtor and the objectives to be achieved

Winding up of the company is usually the last resort as the company will cease to exist upon completionof the liquidation

Judicial management andor the scheme of arrangements are generally used where the intention is tokeep the company alive and to carry on business as a going concern


Under the Companies Act (Cap 50) there are generally 2 tests for insolvency-

bull Inability to pay debts as they fall due (known as ldquocash flowrdquo or ldquocommercialrdquo insolvency and

bull An excess of total liabilities over assets (known as ldquobalance sheetrdquo insolvency)


Winding up There can be 2 forms of winding up namely winding up by the court or voluntary windingup The assumption here is that winding up is due to insolvency as winding up is also available on othergrounds

bull For winding up by the court (on the ground of insolvency) Generally an application to court ispreceded by a statutory demand for payment of a debt If the debt is then not paid or compromised within21 days it is presumed that the company cannot pay its debts when due and the creditor can then file anapplication for the winding up of the company based on this presumption The application is filedtogether with a supporting affidavit The application is usually fixed for hearing about 4 to 6 weeks fromthe date of filing The applying creditor has to carry out various filings and advertisements to complywith the statutory requirements prior to the said hearing if a winding up order is to be made at the saidhearing

bull For voluntary winding up (on the ground of insolvency) The sequence of events are as follows-

o The directors of the company may make a statutory declaration that the company cannot carry on itsbusiness by reason of its liabilities

o A provisional liquidator is to be appointed

o Meeting of the company and creditors must be summoned for a date within 1 month of the making ofthe declaration

o At the meeting of the company the resolution for winding up is passed and a qualified person isnominated to be the liquidator

o At the creditorsrsquo meeting to be held on the same or following day the creditors may choose aliquidator and if different from that of the company the creditorsrsquo choice will prevail

Judicial management Application is filed in court together with a supporting affidavit

Scheme of arrangement There are 3 stages First an application is filed in court for an order that one ormore meetings of members andor creditors be summoned Secondly the proposed scheme ofarrangement is put before these meetings and has to be approved by the requisite majority of each classIf the scheme is approved the court will then have to confirm and sanction the approved scheme in

302

another hearing


Winding up by the court The company itself a creditor a contributory the personal representative of adeceased contributory trustee in bankruptcy or the official assignee of the estate of a bankruptcontributory liquidator of the company a judicial manager or various ministers in certain specifiedinstances

Judicial management The company itself the directors (if so authorized) a creditor or by the creditorsjointly

Scheme of arrangement The company itself any creditor or member of the company a liquidator of thecompany or a judicial manager


Timing depends on each case andor whether there is opposition in the court process


Each of the insolvency processes described above generally have stay provisions to stop claims frombeing pursued in court against the company This provides some breathing space

The scheme of arrangement process allows the management of the company to retain control over thedebt restructuring process As for the winding up and judicial management the management of thecompany is displaced by the liquidator and judicial manager respectively


Yes this would be the scheme of arrangement procedure

3 Creditor issues


Unsecured creditors are affected by the stay provisions for each of the insolvency processes describedabove ndash which means that they are not able to proceed with claims or recovery of debts owed to themfor the duration of the stay

In a liquidation scenario unsecured creditors are only entitled to pari passu recovery on their debts andany uncompleted executions against the assets of the company commenced by unsecured creditors as atthe date of commencement of the winding up will be stayed


This depends on what rights the unsecured creditor is given under the security documentation

Generally if there is a right to appoint a receiver the secured creditor can do so as part of theenforcement of its security


303

Yes set-off will apply in insolvency proceedings For set-off to apply there must be mutuality of debts



Winding up The liquidator

Judicial management The judicial manager

Scheme of arrangement The management of the company


Financing of a company in insolvency proceedings would generally have be sought from private sourcesndash shareholders existing creditors etc This is subject to commercial considerations

In the liquidation scenario there will be generally no financing available and the liquidator willproceed with the liquidation with only the available existing assets the company


The terms in their respective employment agreements will continue to govern the rights of employeeseven where there are insolvency proceedings

The issue would be whether or not they continue to be employed by the company Termination ofemployment can generally be done by giving of adequate or contractual notice by the company employeror the employee themselves Unless contractually provided for there is no legal obligation on the part ofthe company to pay retrenchment benefits

Unpaid wages and salary are preferred debts in the liquidation of a company but are subject to theprescribed order of ranking of preferred debts as well as a prescribed limit The excess beyond theprescribed limit will be treated as an ordinary unsecured debt and be paid based on the pari passuprinciple


Much will depend on the terms of the contracts or the commercial arrangements

Usually insolvency proceedings are specified as events of default - which give the other contractingparties the right to terminate the contracts or commercial arrangements The exercise of such rights oftermination will generally be at the option of the other contracting parties There may however be someprovisions that provide for automatic triggers leading to prescribed consequences

Where the company is in liquidation the liquidator may be able to (subject to conditions) disclaimonerous property or contracts within 12 months of the commencement of winding up

304


What is the method of filing claims

The method of filing claims will be determined by the liquidator judicial manager or the schememanager (as the case may be) Generally this involves the submission by the creditors of proofs of debtsof their respective claims


Secured creditors need not prove for their debts and can realize their security to obtain full satisfactionIf their security is inadequate the excess debt is then treated as an unsecured debt and will be subject tothe ranking of unsecured debts set out below

In a winding up the order of priority of unsecured claims are generally as follows-

bull First cost and expenses of the winding up including the taxed costs of the applicant for the winding uporder the remuneration of the liquidators and the costs of any audit carried out on the liquidatorsrsquoaccounts

bull Secondly subject to a prescribed limit all wages or salary (whether or not earned wholly or in part byway of commission) including any amount payable by way of allowance or reimbursement under anycontract of employment or award or agreement regulating the conditions of employment of anyemployee

bull Thirdly subject to a prescribed limit the amount due to an employee as a retrenchment benefit or exgratia payment under any contract of employment or award or agreement that regulates conditions ofemployment whether such amount becomes payable before on or after the commencement of the

winding up

bull Fourthly all amounts due in respect of work injury compensation under the Work Injury CompensationAct (Cap 354) accrued before on or after the commencement of the winding up

bull Fifthly all amounts due in respect of contributions payable during the 12 months next before on orafter the commencement of winding up by the company as the employer of any person under any writtenlaw relating to employeesrsquo superannuation or provident fund or under any scheme of superannuationwhich is an approved scheme under the law relating to income tax

bull Sixthly all remuneration payable to any employee in respect of vacation leave or in the case of hisdeath to any other person in his right accrued in respect of any period before on or after thecommencement of the winding up

bull Seventhly the amount of all tax assessed and all goods and services tax due under any written lawbefore the commencement of the winding up or assessed at any time before the time fixed for proving ofdebts has expired

The preferred debts listed above (relating to employees) if not paid in full have priority over claims ofdebenture holders under a floating charge (as created was a floating charge) and can be paid out ofproperty subject to that floating charge

305



Yes to some extent - by way of the scheme of arrangement procedure

In the scheme of arrangement the minority of objecting creditors will be bound by a scheme ofarrangement once it has been approved by the majority of creditors and sanctioned and confirmed by thecourt


Winding up is concluded by the final distribution of realized assets to the creditors the order beingmade by the court for the release of the liquidator and for the company to be dissolved

Judicial management is concluded by the discharge of the judicial management order The judicialmanager vacates office when the judicial management order is discharged Judicial management is onlya temporary regime Unless extended by the court a judicial management order will be discharged after180 days

The scheme of arrangement procedure is concluded by the sanction of the court of an approved schemeor by the rejection of the scheme by the creditors of the company

306

South Africa

Eric Levenstein Director Lauren Becker Senior Associate Werksmans Attorneys

wwwwerksmanscoza email elevensteinwerksmanscom lbeckerwerksmanscom tel +27 (0)11535 8237 +27 (0)11 535 8196

South African restructuring and insolvency law is regulated by three principal pieces of legislationnamely the Companies Act 71 of 2008 (ldquoNew Actrdquo) the Companies Act 61 of 1973 (ldquoOld Actrdquo) and theInsolvency Act 24 of 1936 (ldquoInsolvency Actrdquo)

Whilst the New Act came into force on 1 May 2011 the Old Act remains applicable to certaininsolvency procedures not yet catered for by the New Act



There are a number of forms of security that a creditor can take to secure its exposure to a company orcorporation prior to a liquidation or business rescue These include mortgage bonds over immovableproperty special notarial bonds over specified movable assets general notarial bonds over nonspecified movable assets a pledge over movable assets or a cession over various movable assets suchas book debts Over and above this security there is also security that arises by operation of the lawsuch as the landlordrsquos tacit hypothec (lien) Different security gives different creditors a particularranking or status in a liquidation or business rescue

Further during business rescue proceedings any financiers that invest money (post-commencementfinance) in the company or corporation are entitled to secure their investment with any asset of thecompany that is not already encumbered and their claims (secured or unsecured) will rank close to thetop of the order of preference conferred on the claims of creditors in terms of the New Act and theInsolvency Act


In liquidation proceedings certain dispositions of assets that have been disposed of or preferencesconferred on one or other creditor within certain periods of time prior to the company or corporationgoing into liquidation may be set aside by the liquidator This could include taking security at a timewhen the company is insolvent Further dispositions made in collusion with one or more creditors priorto the company or corporation going into liquidation may also be set aside

In business rescue proceedings it is not clear at this stage whether or not any dispositions made by acompany or corporation prior to the commencement of business rescue can be set aside as voidabledispositions as they could in a liquidation However any dispositions of property or preferencesconferred in favour of any particular creditor or creditors in a business rescue will not be set aside ifthe company or corporation subsequently goes into liquidation provided they are sanctioned in terms ofa business rescue plan These transactions would have been sanctioned by creditors in the businessrescue plan This is provided of course that such transactions were validly concluded in an effort tofacilitate the business rescue process and in the interests of the company and all stakeholders and not

307

for fraudulent purposes


In terms of both the New Act and the Old Act a director of a company may be held personally liable fortrading a company recklessly with gross negligence with intent to defraud creditors or for a fraudulentpurpose The level of personal liability that a director may incur has in some instances been augmentedby the provisions in the New Act

When a company or corporation is insolvent or financially distressed and it continues to incur credit at atime when the directors know full well that the company or corporation will not be able to pay suchcreditors the directorsrsquo conduct may attract personally liability on either of the above grounds

In respect of business rescue the New Act obliges directors to notify creditors shareholders andemployees (or their representatives) of the fact that a company is financially distressed and if they donot intend to utilise business rescue proceedings notwithstanding the companyrsquos financial distress thereasons why the directors do not want to place the company or corporation in business rescue Adecision to send out this particular notice must be well considered as it may give rise to unintendedconsequences such as personal liability for directors or it may constitute an act of insolvency

2 Taking action


South African law distinguishes between rescue procedures for companies or corporations that arefinancially distressed and insolvency or liquidation proceedings for those that are insolvent

In terms of the New Act a new procedure called business rescue has been introduced into our law forcompanies or corporations that are financially distressed This is essentially a form of administration Ifa company is insolvent companies or corporations may be placed in liquidation

A further alternative available to companies or corporations is the compromise procedure contained inthe New Act It allows a company to enter into an arrangement with its creditors to compromise its debtWhilst regulated by the New Act it is a more informal procedure and can also be effected duringwinding-up proceedings


A company or corporation may want to convene a meeting of its creditors and attempt to reach anagreement with them to compromise their debt Such an agreement must be accepted by all of thecreditors of the company for it to be binding on all creditors and a undertaking should be furnished bythe creditors that they will not proceed to liquidate the company


Liquidations are traditionally more creditor-friendly They aim to ensure that the creditors of thecompany or corporation receive the maximum dividend or value for their claims

Business rescue on the other hand is more debtor friendly in that a moratorium is placed on the rights ofclaimants in respect of the institution andor enforcement of their claims against the company orcorporation or in respect of property belonging to the company or corporation or lawfully in its

308

posessions with the ultimate aim to provide the company or corporation with breathing space in anattempt to restore the company or corporationrsquos solvency or liquidity or if this is not possible to achievea better dividend for the creditors and shareholders of the company or corporation than would aliquidation

The difference between business rescue and a compromise in terms of the New Act is that with acompromise there is no moratorium that arises by operation of the law and thus the process could inessence be said to be more supportive of the interests of creditors (as they can still enforce their claims)than would be the position with a business rescue


A company will be financially distressed when it appears to be reasonably unlikely that the companywill be able to pay all of its debts as they become due and payable within the immediately ensuing sixmonths (commercial insolvency) or it appears to be reasonably likely that the company will becomeinsolvent (ie with its liabilities exceeding its assets) within the immediately ensuing six months (factualinsolvency) The test for financial distress is thus a forward looking test It attempts to contemplate thesituation in which the company will find itself in the ensuing six months This test is used to determinewhether a company or corporation should commence businesss rescue

On the other hand a company will be held to be insolvent if its liabilities either exceed its assets(factual insolvency) or if it cannot pay its debts as and when they fall due (commercial insolvency) Theformer is the more appropriate test for companies or corporations in that very often a company orcorporation will be factually insolvent but not commercially insolvent

The compromise procedure in the New Act however can be used if a company is financially distressedor insolvent but not if a company is under business rescue


A company or close corporation can be placed in business rescue voluntarily by the board of directorsadopting and filing a resolution to commence business rescue and to place the company under thesupervision of a business rescue practitioner Thereafter a number of forms and documents would needto be submitted to the companies office for filing A formal application can also be made to court byaffected persons (creditors employees shareholders) to place a company in business rescue(compulsory business rescue) Once the company is placed in business rescue the order of the courtmust be provided to all affected persons notifying them of the commencement of business rescue Avoluntary business rescue application cannot be filed if a compulsory business rescue application hasbeen initiated or if liquidation proceedings have already been initiated by or against the company

Importantly the provisions of the New Act apply only to the liquidation of solvent companies orcorporations whilst the provisions of the Old Act apply to the liquidation of insolvent companies

A company or corporation may be liquidated voluntarily (at the instance of the creditors ofshareholders) by the passing of a resolution to that effect and by thereafter filing such resolution andvarious other forms and documents with the companiesrsquo office or pursuant to a formal application tocourt Thereafter notice of the liquidation order would be served on all affected parties in accordancewith the directions provided by the court order


A company or corporation can be placed in business rescue voluntarily by virtue of the board ofdirectors passing a resolution to place the company or corporation in business rescue and under the

309

supervision of a business rescue practitioner Further a creditor shareholder or employee (or thelatterrsquos representative) can make formal application to court to place the company in business rescue(compulsory business rescue)

Generally speaking a company or corporation may be liquidated voluntarily by virtue of the passing ofa resolution to that effect by the directors of the company on the instruction of the creditors orshareholders or on application by the company a business rescue practitioner a creditor or group ofcreditors a director or directors or shareholders among others on application to court


Compulsory business rescue applications and liquidation applications require the involvement of thecourts for initiation of the process whilst voluntary procedures do not The compromise procedurebrings about little involvement by the courts Courts will from time to time be involved when there aredisputes that cannot be resolved


Business rescue proceedings are designed to take 3 months from start to finish But in practice it hasbecome clear that this period is too short and is often extended from time to time provided the businessrescue practitioner procures the requisite support of the creditors The time period may be truncated orlengthened depending on whether or not the company in distress requires further time to implement thebusiness rescue or for example is caught up in lengthy litigation

Liquidation proceedings from start to finish can take anything from 6 months to 5 years depending on thesize of the estate and the nature and complexity of the transactions with which the company orcorporation was involved Once the company or corporation is placed in liquidation a liquidator isappointed and he or she is tasked with gathering up all the assets and realising them for their maximumvalue by private treaty or public auction In so doing the liquidator will prepare various liquidation anddistribution accounts and once confirmed by the Master of the High Court will allocate the payment ofdividends to various creditors in a particular order of preference


Both compulsory and voluntary business rescue procedures and liquidations (both voluntary andcompulsory) require the publication andor filing of various notices which depends in some instanceson the manner in which the business rescue or liquidation unfolds


A liquidated company is exonerated from its liability to creditors

A company that has been placed under business rescue will have the benefit of a moratorium on allclaims against the company or in respect of property in its possession or belonging to it until such timeas the business rescue proceedings have ended Further the claims of the creditors are likely to becompromised pursuant to the preparation of a business rescue plan and once a plan has been adoptedand implemented the company is likely to continue to trade on a solvent basis or if this is not the casethen at the very least the company should achieve a better dividend for the creditors and shareholdersthan they would receive in a liquidation

With the compromise procedure if the compromise is accepted and adopted in accordance with theprovisions of the New Act the claims of creditors may be compromised depending on the arrangementreached

310


Business rescue is the process in South Africa that is most akin to what is commonly known as aldquodebtor-in-possession processrdquo


In business rescue and liquidation proceedings labour legislation may need to be carefully consideredwhen the company intends to either retrench its staff or when the company is sold as a going concernFurthermore in both liquidation and business rescue proceedings if the company is sold by way of asale of shares Competition Commission approval may be required The finalisation of the liquidation orthe implementation of the business rescue plan may be subject to the fulfilment of this suspensivecondition Further depending on the nature of the business under rescue or liquidation (and if thebusiness is acquired out of liquidation regarding the latter) regulatory approvals may be required Thistoo would be a suspensive condition to the finalisation of any liquidation or the implementation of thebusiness rescue plan


The introduction of the New Act into South African law has changed the landscape of company law inSouth Africa In this regard one of the primary objects of the New Act is to provide for the efficientrescue and recovery of financially distressed companies or corporations in a manner that balances therights and interests of all stakeholders (ie the company creditors shareholders and employees) Whilstliquidations are still common practice in South Africa their use has declined since the introduction ofbusiness rescue into our law Efforts are now being focussed on rescuing companies where appropriatebefore considering liquidation and attempts are made to balance the rights of all stakeholders Thesetwo factors may come into play at different points in the business rescue process However the same isnot likely to be considered in the liquidation or the compromise procedure

3 Creditor issues


Unsecured creditors in both business rescue and liquidation proceedings must file their claims with thebusiness rescue practitioner or liquidator respectively and annex evidence which supports their claimIn liquidation and business rescue proceedings unsecured creditors may be preferent or concurrentcreditors Concurrent creditors rank behind all the secured and unsecured creditors and will receive anegligible dividend if any on a liquidation

In a business rescue depending on how the business rescue plan is structured concurrent creditors mayor may not receive a dividend Generally though concurrent creditors would receive some cents forevery Rand of their claim in order to make the plan more attractive to them than would occur in aliquidation which may realise no dividend at all for concurrent creditors This would in turn influencethe manner in which concurrent creditors vote on a business rescue plan


The enforcement of security depends on the nature of the security held and generally but not alwaysneeds to be perfected prior to the commencement of liquidation or business rescue proceedings Theavenue of the courts is also always open to a creditor who wishes to enforce its security

311


A right of set-off applies unless the parties have excluded the operation of set off by a prior agreementbetween them The debts between two parties are extinguished or reduced (as the case may be) at themoment when they first become capable of being set off However once liquidation proceedings havecommenced and a concursus creditorum is formed (ie crystallisation of the creditors claims) set-off isnot permissible unless it was applied between the parties in the ordinary course of their business andprior to the commencement of liquidation

In business rescue proceedings despite the moratorium on the claims of creditors against a company inbusiness rescue set-off against any claim made by the company in any legal proceedings irrespective ofwhether those proceedings commenced before or after the business rescue process will be applicableAccordingly set-off is permitted in business rescue proceedings


Inter-company debts are treated in the same way as claims of third party creditors in liquidation orbusiness rescue proceedings


As a matter of course creditors are only entitled to enforce their rights to their claims with the debtorcompany or corporation and not with an associated or affiliated entity Only where a third party hasstood surety for the debtor company or guaranteed the obligations of the debtor company and where theright of the third party against the surety or guarantor remains extant can such creditor enforce his or herright against such third party provided the creditors claim has not been compromised This is theposition in both liquidation and business rescue proceedings


In liquidation proceedings a creditorsrsquo committee is not formed but the liquidator will call variousmeetings of the creditors at which meetings it will receive claims and take certain instructions from thecreditors

In a business rescue the business rescue practitioner will ask the creditors at the first meeting ofcreditors if they wish to form a creditors committee and may appoint members to such committeeThrough the committee the creditors are entitled to engage with and be engaged by the business rescuepractitioner in the development of the business rescue plan They are not permitted to give directions tothe business rescue practitioner Generally speaking creditorsrsquo committees will only be established inmatters where there are a many creditors making it more manageable for the business rescuepractitioner to communicate with the general body of creditors



In liquidation proceedings the liquidator controls the company and its assets vest with him or her Inbusiness rescue proceedings the business rescue practitioner has full management control of thecompany and the directors though not exonerated from their duties and responsibilities (andcorresponding liabilities) are answerable to the business rescue practitioner Any action taken by adirector whilst the company or corporation is in business rescue which requires the approval of the

312

business rescue practitioner and where approval is not sought will be void


During liquidation proceedings the company is funded through the proceeds received from a sale of thecompanys assets To the extent that there is not enough free residue in the estate to defray the costs ofadministering the estate the creditors who have proved claims in the estate will be required to make acontribution to the liquidated estate to cover the administration costs

In business rescue proceedings the company is funded by financiers or suppliers who provide ldquopost-commencement financerdquo This is finance that becomes available to the company or corporation post thecommencement of business rescue or the credit provided by creditors who continue to supply thecompany whilst in business rescue In terms of the New Act monies that become due and owing toemployees during business rescue are also considered to be post-commencement finance


In business rescue proceedings debtor-in-possession funding (referred to as post-commencementfinance) is possible but not in liquidation proceedings


In liquidation proceedings employment contracts are immediately suspended for a period of time andmay in time be cancelled by a liquidator after he or she has given due consideration to appropriatemeasures to prevent cancellation of employment contracts and in turn retrenchment All suspendedcontracts not already terminated by the liquidator will be automatically terminated 45 days after thedate of the final appointment of the liquidator

Employment contracts remain of full force and effect during business rescue proceedings and may not beamended without the agreement of the employee and in any event only in accordance with labourlegislation Further employees may not be automatically retrenched during business rescue proceedingsand the provisions of our labour legislation must be followed despite the fact that the company is infinancial distress


Generally speaking in the absence of an express statutory provision to the contrary all contractsconcluded with the company remain in effect when the company is placed in liquidation However theliquidator cannot be expected to render specific performance in terms of the contract as the liquidatorwill need to act in the best interests of the company The liquidator will therefore need to decide withina reasonable period of time whether or not he or she intends to continue with the contract

In business rescue proceedings contracts concluded between the company or corporation prior to thecommencement of business rescue remain of full force and effect The business rescue practitioner hasthe discretion to either suspend the contract or to cancel it but the latter can only be done on applicationto court

Insofar as contracts afford the counterparty with an opportunity to terminate such contract as a result ofthe occurrence of a business rescue or liquidation such party would also be entitled to cancel suchcontract


313


In liquidation proceedings creditorsrsquo claims are filed on affidavit and supported with evidence toindicate that the company is in fact indebted to the creditor

In business rescue proceedings the procedure is less formal and the claim need not be submitted onaffidavit In practice business rescue practitioners compile their own forms and produce them to thecreditors for the submission of creditorsrsquo claims


In liquidation proceedings a creditor must file his or her claim with the liquidator at the first or secondmeeting of creditors Thereafter if the creditor wishes to file a claim he may ask to convene a special orgeneral meeting at which meeting he or she will file his or her claim The costs of convening suchmeeting will be for that creditorrsquos account Only creditors who have proved their claims will benefitfrom a distribution Former employees and in some instances employees of the liquidated estatehowever need not submit formal claim forms

In business rescue proceedings there is no specific time period within which a business rescuepractitioner may receive claims Typically claims are submitted at the first meeting of creditors andthereafter up until such time as the business rescue plan is published by the practitioner for theconsideration of all affected persons The practitioner may however determine a date by which allclaims must be submitted In some instances practitionerrsquos take account of the position of all creditorswhether or not they prove their claims when preparing the business rescue plan This is an aspect of theNew Act which has yet to be determined by our courts


In liquidation proceedings the claims of creditors rank in a particular order of preference as prescribedby the Insolvency Act namely (i) costs of administration of the liquidated estate (ii) secured creditors(paid out of the proceeds of their security first) (iii) costs of liquidation (ie costs of the application tocourt) (iv) costs of execution (costs of the sheriff and the persons used to assist in the realisation andexecution of the assets) (v) payment of salaries and remuneration to employees (vi) statutoryobligations (ie payment of taxes) and (vii) the remainder of the free residue is paid to concurrentcreditors This position will be altered if business rescue proceedings supersede the liquidationproceedings

In business rescue the free residue is used for the fees of the business rescue practitioner and thereasonable expenses incurred in administering the business rescue rank first thereafter the claims ofemployees for payments due and owing to them post the commencement of business rescue Once theaforesaid creditors are paid the remainder of the monies received (and any free residue) in businessrescue are applied to secured post-commencement financiers and then unsecured post-commencementfinancier and thereafter to creditors who were secured prior to the commencement of business rescueThereafter any claims by employees prior to the commencement of business rescue as well as theclaims of all unsecured creditors will be satisfied This position will be altered if liquidationproceedings supersede the business rescue proceedings Secured creditors remain secured and are paidout of their security If their security does not cover their claim fully they are concurrent creditors forthe balance


Each matter will need to be considered on a case by case basis to the extent that any issue arises in

314

either liquidation or business rescue proceedings



Cram down procedures do not exist in respect of liquidations in South Africa but they do exist inrespect of business rescue proceedings Essentially the adoption of the business rescue plan requires thevote of 75 of the creditors voting at value and at least 50 of the votes of independent creditors mustsuppport the plan If a creditor votes against a business rescue plan and the plan is not adopted suchcreditors voting interest can be bought out at its liquidation value or the vote may be set aside onapplication to court as an inappropriate vote


In liquidation proceedings the liquidator will prepare various liquidation and distribution accountsOnce the final liquidation and distribution account is prepared and confirmed by the Master of the HighCourt the proceeds will be distributed to the creditors (and shareholders only thereafter) and the estatewill have been finally wound up

Business rescue proceedings will end when (i) the High Court sets aside the resolution or order thatbegan the business rescue proceedings or when the court converts business rescue proceedings intoliquidation proceedings (ii) a business rescue practitioner files a notice of termination of businessrescue proceedings with the companies office and (iii) when a business rescue plan has been proposedand rejected and no affected person has acted to extend the business rescue proceedings in any mannercontemplated by the New Act or when a business rescue plan has been adopted and the business rescuepractitioner has subsequently filed a notice of substantial implementation of the plan


In liquidation proceedings the probable dividend to be paid to creditors depends on the whether or notthe business is sold out of the liquidation and if not whether or not there is any value that can berealised from a sale of the assets either by private treaty or by public auction

In business rescue proceedings the dividend to be paid to creditors depends on the manner in which thetransaction is structured (ie asset sale sale of business or sale of shares) Generally speaking thoughin order for the plan to be attractive to creditors creditors they must be better off if they adopt thebusiness rescue plan than they would be if the company were to go into liquidation Without this therewould be little incentive for creditors to support a business rescue plan



The company or corporation and its creditor in an attempt to restructure and resuscitate an ailingcompany can engage in an informal compromise With this however the support of all creditors isneeded in order for the process to be a success as there would be no moratorium imposed on the claimsof creditors against the company or corporation as would arise in a business rescue It is also prudent insuch instances for an undertaking to be procured from the creditors confirming that they will not

315

proceed to liquidate the company


There are no formal processes other than business rescue liquidation or formal or informalcompromises with creditors



None


Historically South African courts in respect of cross border insolvency matters have been amenable torecognising foreign liquidators or administrators and to extend their powers to South Africa Recently aHigh Court in South Africa recognised the bankruptcy process of a foreign company and certainprovisions of the law applicable to that bankruptcy in South Africa

What is the involvement of attorneys

Attorneys are well placed to assist all role players involved in liquidations the business rescue orcompromise proceedings In our experience each role player be it a creditor shareholder or employeeof the insolvent company or company in distress or the liquidator or business rescue practitioner itselfwill always require the assistance of external legal counsel when considering its position within each oftheir processes

Werksmans Attorneys is at the forefront of insolvency and business rescue advisory in South Africa andhas a team dedicated to advising all role players on all aspects of the liquidation business rescue andcompromise process

316

Spain

Daniel Rueda Silva Senior Associate Director Mercantile Department Diaz-Bastien amp TruanAbogados

wwwdbtlexcom email druedadbtlexcom tel +34 91 577 36 60



Real estate Mortgage Must be notarized and registered at the Land Registry Attracts stamp duty theamount of which varies by Autonomous Community If the debtor defaults on repayment of the debt thecreditor can enforce its rights through summary proceedings During enforcement the creditor can askthe court to administer the assets1 Spanish secured creditors will not suffer any of the dilution of claimsrelated to the bankruptcy process if they avoid it and foreclose on the collateral instead This makes themortgage system a very attractive alternative insolvency institution In Spain bankruptcy procedurestakes much longer than foreclosures

Shares2 Pledge Must be notarized Permits the pledge of existing issued shares only Extension tofuture shares will require a pledge update Pledges are recorded in Shareholdersrsquo Book if shares arenominative The creditor can also ask the Court for the property to be sold to recover the debt

Receivables and contractual rights Pledge Must be notarized Written notice to the third party debtoris advisable but not a requirement for perfection of the pledge Trade creditors can use credit rights(garantiacuteas de creacutedito) to secure unpaid debts3

Bank accounts Pledge Must be notarized Written notice to the account holding bank is advisable butnot a requirement for perfection of the pledge

Plant and machinery Chattel mortgage Must be notarized and registered at the Chattel Mortgage andNon-Possessory Pledge Registry (Registro de Hipoteca mobiliaria y Prenda sin desplazamiento)Attracts stamp duty the amount of which varies by Autonomous Community

Intellectual property Chattel mortgage Must be notarized and registered at the registry of moveableproperty Attracts stamp duty the amount of which varies by Autonomous Community

Business goodwill No security can be granted Possibility for a Spanish company to grant upstreamguarantees

[1] See letter g) below

[2] Royal Decree Law 52005 of 11 March provides secured lenders with material enforcement advantages and insolvency protection

[3] Article 9016 of Spanish Insolvency Law amended by Law 382011 provides that those credits considered to be future credits will only be consideredprivileged in relation to an ordinary pledge guarantee when recorded in a public registry with a date prior to the declaration of insolvency


317

The transactions executed by the debtor during a two-year period prior to the initiation of insolvencyproceedings and that are detrimental to the debtorrsquos estate may be challenged and annulled even in theabsence of fraud

To make it possible to exercise the action to annul a disposal of an asset the Law presumes either byrebuttable presumption or ldquojuris et de jurerdquo presumption that the act in question is detrimentalGenerally speaking the burden of proof that an act is detrimental falls on the insolvency administratorsor receivers All donations and disposals between living persons free of charge and payments ofclaims falling due after the opening of the insolvency proceeding are presumed to be detrimentalacts without admission of evidence to the contrary Providing collateral for already existing debts andcarrying out business transactions with relatives for a consideration and in the case of a legal personwith the de facto and de jure director the main shareholders or the group companies are also presumedto be detrimental acts but in this case evidence to the contrary is admitted

An action to annul an act or transaction is compatible with other actions for reimbursement (invalidityannulment termination on grounds of fraud by creditors etc ndashacciones de reintegracioacutenmdash) All thesemust be heard by the insolvency Court at an incidental hearing The incidental insolvency proceedingincludes a phase for written submissions (application and reply) and a hearing to examine the evidenceproposed and declared to be relevant after which the judge hands down a judgment This incidentalproceeding which is held concurrently with the insolvency proceeding is used to resolve anydeclaratory lawsuit as part of the insolvency proceeding

Moreover it must be highlighted that amongst other cases the Spanish Insolvency Law 2003 providesthat the insolvency will be determined in any case as being lsquoguiltyrsquo if he debtorrsquos assets arefraudulently transferred out from the debtorrsquos estate during the two years prior to the declaration ofinsolvency

The general effect of the claw-back is the annulment and simultaneous restitution of whatever they mayhave already received from the other

Refinancing agreements by which there is generally at least a significant increase of credit oramendment of its obligations either through the extension of its maturity either through the establishmentof other obligations in lieu thereof (the ldquoRefinancing Agreementrdquo4 ) are not subject to claw back(neither such Refinancing Agreement nor agreements payments or security or guarantees arising fromthe said Refinancing Agreements are impeachable) provided that certain conditions are met


Directors may face the following liabilities if they do not file or file late for insolvency proceedings(Voluntary Insolvency) or a third party files a Necessary Insolvency with the Court as explained insections below

(i) In the event of insolvency proceedings ending in liquidation directors can be sanctioned to pay theamount of credits that remain unpaid after the liquidation of the debtor5

(ii) It is also possible that at any stage the judge may order the seizure of goods owned by directors(including shadow and de facto directors during the above referred period of time of two years) when itis foreseeable that the insolvency will be declared as lsquoguiltyrsquo and that there will not be enough assets topay all debts

(iii) Notwithstanding the above directors may also face criminal as well as corporate law liabilityand in particular regarding the latter the most important case in this respect is the mandatory dissolution

318

of the company imposed upon the directors by corporate law if the companyrsquos net worth falls below halfof its share capital (capital impairment situation)

Generally speaking directorsrsquo liability is very strict and this is taken in consideration in the insolvencyproceedings6 When directors have not run the company properly or have not filed for insolvency withinthe term set by law they risk being declared liable for the companys debts

[4 ]Royal Decree-Law 42014 of 7 March establishes new mechanisms aimed at encouraging Refinancing Agreements

[5 ]Without prejudice of derivate or subsidiary actions complaints in cases of fraud criminal offences etc lodged against directors if no insolvencyproceeding has been filed

[6 ]Also note that Royal Decree-Law 42014 of 7 March establishes a presumption of willful misconduct and gross negligence in relation to the rating of theinsolvency situation as guilty when the debtor or if applicable its legal representatives directors or liquidators have refused to carry out the capitalization ofthe credits (or issuance of securities or convertible instruments) without reasonable cause frustrating the efforts for a Refinancing Agreement

2 Taking action


1 The directors of a company have an obligation to file for insolvency (ie debtorrsquos requestedinsolvency the ldquoVoluntary Insolvencyrdquo) within two months from the date they become aware or shouldhave become aware of the insolvency situation

2 The general obligation to file for Voluntary Insolvency does not apply if the debtor notifies the Courtthat it has initiated negotiations with its creditors to obtain lock-ups to an anticipated compositionagreement or to negotiate an out-of-court Refinancing Agreement (the so-called 5bis communication orPre-Insolvency Communication) In such case the debtor will gain an additional three month periodto achieve an agreement with its creditors and one further month to file for insolvency In additioncreditorsrsquo applications to file for Necessary Insolvency during that period will not be accepted

In any case it is advisable to submit a statement with the Court notifying the commencement ofnegotiations with creditors no proof needs to be provided in this respect but may protect the companyandor its directors from liabilities in case the company requires requesting insolvency proceedingsafter a four-month period (pre-insolvency phase) has elapsed Only one Pre-Insolvency Communicationmay be served per year If the debtor does not reach any agreement an insolvency petition must be filedwith the Court

3 On a separate point Law 142013 to support entrepreneurs and their internationalization published inSpainrsquos Official State Gazette on 28 September 2013 (hereinafter the ldquoEntrepreneurs Lawrdquo) establishesschemes outside the insolvency proceeding between some types of debtors and their creditors under ascheme called ldquoout-of-court payments agreementrdquo approved by a new body an Insolvency Mediator

Entrepreneurs Law has added a new Title X to the Insolvency Law dealing with the out-of-courtpayments agreement a mechanism designed to secure out of court negotiation of a payments plan withcreditors as an alternative to the insolvency proceeding and to the formal Refinancing Agreementsubject to compliance of certain criteria and thresholds

a) an entrepreneur (an individual) in a position of current or imminent technical insolvency withliabilities below EUR5 million and

319

b) a legal entity in a position of technical insolvency with fewer than 50 creditors and assets orliabilities below EUR5 million provided that in both cases the costs of the agreement can be metand the projected assets and revenues will be sufficient to allow a viable agreement The majorityneeded to approve the payments plan is 60 of the total liabilities or 75 if it includes assetsgiven in payment (in this latter case it must have the approval of the creditors with securityinterests in the assets given in payment) Only the creditors affected by the payments plan will becomputed to determine the quorum

The consecutive insolvency proceeding (concurso consecutivo) takes place following a petition for aninsolvency order by the debtor or by the creditors where they can prove that they were unable to reachan out of court payments agreement or if such an agreement has not been fulfilled or has been cancelledIn an insolvency proceeding of that type the liquidation phase will commence simultaneously If thedebtor in the concurso consecutivo is an individual and the proceeding is judged to be non guilty thejudge will decide on the remission (or cancellation) of any debts that were not paid in the liquidation ofassets during the insolvency proceeding except for public law debts provided all the post-insolvencyorder claims and preferred claims have been satisfied in full This is the so-called ldquofresh startrdquo whichhas made its first appearance in Spanish law although with restricted effects

4 Any creditor is entitled to file for the debtorrsquos insolvency (ie a creditorrsquos requested insolvency theldquoNecessary Insolvencyrdquo) basing its claim on the insufficiency of attachable assets when enforcing itscredits against the debtor or otherwise by providing evidence of any of the following facts

(i) general default of the debtorrsquos payment obligations

(ii) general seizure of the debtorrsquos assets

(iii) sale of the debtorrsquos assets at a loss or in a negligent manner (or being put beyond creditorrsquos reach)

(iv) the debtorrsquos failure to pay during the three-month period preceding the filing for NecessaryInsolvency its tax liabilities social security obligations or salary and other monetary employmentobligations


Normally the debtor will arrange out-of-court debt restructuring which involves changing thecomposition andor structure of assets and liabilities of debtors in financial difficulty without resortingto a full judicial intervention and with the objective of promoting efficiency restoring growth andminimizing the costs associated with the debtorrsquos financial difficulties

Restructuring activities can include measures that restructure the debtorrsquos business (operationalrestructuring) and measures that restructure the debtorrsquos finances (financial restructuring) Purelycontractual restructurings enhanced restructurings (purely contractual workouts that are enhancedby the existence of norms or other types of contractual or statutory arrangements) and hybrid procedures(procedures where the involvement of the judiciary or other authorities is an integral part of theprocedure but is less intensive than in formal insolvency proceedings) represent in numeroussituations an efficient alternative or a useful complement to purely formal insolvency proceedings


Private work outs are the most creditor-friendlydebtor friendly approach such as

(i) Informal contractual agreements with creditors as being flexible as opposed to the relativerigidity of the formal insolvency proceedings

320

(ii) Companies that sell major assets (or assign them on a ldquodatio in solutumrdquo purpose) with highliquidation value to satisfy the outstanding debts before closing the business

(iii) Royal Decree-Law 42014 of 7 March establishes three new mechanisms aimed at encouragingRefinancing Agreements before state of insolvency is declared by the Court7

[7]See Annex I to this Questionnaire


The Spanish Insolvency Law 2003 establishes a single insolvency procedure applicable to every debtorin insolvency (ldquoconcursordquo) and is subject to the following lsquoequity testrsquo the incapability of the debtor tocomply with its obligations regularly when they become due and payable (the ldquoCurrent Insolvencyrdquo)Additionally the debtor may also apply for insolvency if it foresees such situation in the imminent future(the ldquoImminent Insolvencyrdquo8)

As stated above a company must apply for insolvency within two months as from the date on which itbecomes aware or should have become aware that it is insolvent The Spanish Insolvency Law 2003sets out a series of situations in which the company is deemed to have knowledge of insolvency

The following circumstances presume that directors knew of the insolvency situation

i General default of payments

ii Attachments on the majority of the corporate assets

iii Removal or fire sale of assets

iv General default on any of the following obligations for three months taxes social security duessalaries

[8]Similar to Germanyrsquos lsquothreatening insolvencyrsquo(Drohende Zahlungsunfaumlhigkeit)


Spanish Insolvency Law 2003 created specialized Courts (Juzgados de lo Mercantil) specialized indealing with matters related to Commercial Law including insolvency Thus debtors and creditors asthe case may be must file for a petition of Voluntary or Necessary Insolvency proceedings respectivelyat the Juzgado de lo Mercantil (the ldquoCourtrdquo)

The insolvency proceeding commences with the filing of an insolvency request with the Juzgado de loMercantil of the capital of the province in which the debtor has its centre of main interest (COMI)9Certain documents must be accompanied with the said request which may vary depending on who thepetitioner is and if the insolvency is imminent or current

For legal entities COMI is the place where the debtorrsquos registered addresses is located The SpanishInsolvency Law 2003 also covers the insolvency of groups of companies Public bodies cannot bedeclared bankrupt There are also special provisions for insurance companies or banks that becomeinsolvent Insolvency applies to both natural and legal persons


321

The debtors can file an application for commencement of bankruptcy (Voluntary Insolvency) if it isunable to pay its debts as they become due (Current insolvency) or if it foresees that this will happen inthe near future (Imminent insolvency) as explained above

The creditors10 are also entitled by the law to file an application for commencement of NecessaryInsolvency in the cases provided under Spanish Insolvency Law 2003

[9 ]The European Court of Justice has clarified the rules on when a companyrsquos centre of main interest (ldquoCOMIrdquo) can be transferred from one member stateto another and what sort of activity is required in a member state for its courts to have jurisdiction to open secondary insolvency proceedings (Re Interedil Srl-in liquidation- Case C-306-09 20 October 2011)

[10] The law recognizes the creditor that initiated the proceeding by regarding a part of its credit ndash ie up to one fourth ndash as a privileged credit


The Court will be involved until the finalization of any of these two stages i) the settlement ofcreditors which aim is to reach an agreement between the debtor and the creditors for the payment ofthe credits (ldquoConveniordquo) or ii) the liquidation which aim is to liquidate the active bankruptcy estate inorder to pay the debts The liquidation stage will be initiated if no agreement is reached or in case ofnon-compliance by the debtor with the agreement


It is not easy to estimate how long insolvency proceedings will take but 15 to 24 months may be normal11 depending on the complexity of the case

[11] Median length of a bankruptcy process in 2007 ranged between 20 and 23 months Such figures mainly correspond to a pre-crisis situation The economiccrisis made the number of bankruptcy filings soar since 2008 implying a congestion of the courts and a dramatic increase in the median length of thebankruptcy process between 27 and 35 months in 2008 between 31 and 36 in 2009 and between 28 and 36 in 2010 (Van Hemmen 2009 2010 2011)


The declaration of insolvency must be published in the Official State Gazette (Boletiacuten Oficial delEstado) and must also be recorded at the Insolvency Public Registry (Registro Puacuteblico Concursal)

Any form of advertising deemed necessary for the notification of bankruptcy may also be used

All other declarations to be published by means of edicts shall be published in the Insolvency PublicRegistry and the Courtrsquos bulletin board

The Court declaration of insolvency together with all other bankruptcy resolutions other than Law whichmust be advertised shall be posted at the Insolvency Public Registry

The declaration shall also be entered in the Commercial Registry preferably by electronic means andin all other administrative records as necessary


The objective of insolvency proceeding12 is either to

(i) Restructure the companyrsquos debt in order to allow the debtor to continue operating The debtormakes an arrangement with creditors to reduce its debt over a certain period of time up to thelimitations set by the Spanish Insolvency Law 2003 or

322

(ii) Wind up or liquidate the company in order to sell the assets and repay all of the debt owed to thecreditors as much as possiblep or liquidate the company in order to sell the assets and repay all of thedebt owed to the creditors as much as possible

The company judicially declared insolvent will normally benefit from the following rights and duties

a) In a Voluntary Insolvency directors remain in their positions and the company continues managing itsassets (lsquodebtor-in-possessionrsquo) subject to the supervision of the Court appointed InsolvencyAdministrator(s) (administradores concursales) unless the court forces it to be treated in the same wayas a Necessary Insolvency in which case receivers take over the administration of the companys assets

b )Unless the company requests its liquidation its business does not usually cease upon the request ofinsolvency If the receivers are merely supervising they determine the activities and transactions that thecompany can continue to manage in the ordinary course of business If the receivers take over themanagement of the business they must take the necessary steps to ensure that its commercial activitiescontinue

c)During insolvency proceedings shareholders continue to function as usual but receivers can attendand have the right to be heard at their meetings The same applies for the board of directors meetings

d) Once the debtor has been declared insolvent the Spanish Insolvency Law 2003 sets forth differentclasses of creditors whose claims are given priority or preferential status However some minor butsignificant exceptions exist which affect the concept of equal and ratable distribution among allcreditors (par condition creditorum ndash pari passu) This is achieved by amending the status of somecreditorsrsquo claims - making them effectively pre-preferential For example under Spanish law claims ofan administrative and labor-related nature are not automatically suspended on the date of the declarationof the bankruptcy Creditors must submit proof of their claims within one month of the courts decision tocommence insolvency proceedings

e) Debts of ordinary creditors and subordinated creditors are not paid until the agreement isapproved

f) Any proceedings that a creditor may wish to bring against the insolvent company that could affect itsassets must be heard before the insolvency judge at the Court No arbitration proceedings can becommenced against the debtor If court andor arbitration proceedings have already begun they continueuntil the judgment or award becomes final and binding

g) No individual judicial or extra-judicial enforcement actions can be brought against the companysassets and actions that have already begun are stayed from the date of the declaration of insolvencyHowever there is an exception for creditors with a security interest in property over assets of thecompany that are used in its commercial activities these creditors can bring enforcement proceedingsfrom the date on which the composition agreement (ldquoConveniordquo) is approved or after one year of theinsolvency resolution if the liquidation has not begun

h) The companys debts cannot be set off against monies owed to it

i) No interest accrues other than interest on debts that have a legal guarantee (mortgages salaries)

j) The statute of limitation period for actions relating to debts that pre-date the insolvency is postponedduring insolvency proceedings

k) Contracts with mutual obligations that have not yet been performed remain in force although the

323

creditor can request termination of the contracts before the Court if the company defaults (Clausesallowing a contract to be terminated in cases of insolvency are null and void)

[12] This procedure affects both individuals and legal entities


If the company files for its own insolvency (Voluntary Insolvency) the Court (except in clear cases ofdeep economic distress or doubts about the credibility of the directorsrsquo behaviour) will leave the boardof directors or administrative body in control (similar to US Chapter 11 lsquoDebtor-in-possessionrsquo)throughout the entire procedure under the supervision of the Court appointed InsolvencyAdministrator(s) Moreover the company will not cease day-to-day trading unless it is evident that it isworthless as a going concern


Local red-flags are normally those pertaining substantive tests laid down by Spanish Insolvency Law2003 such as

(i) general default of the debtorrsquos payment obligations when they become due

(ii) general seizure of the debtorrsquos assets preventing creditors from exercising their securities

(iii) sale of the debtorrsquos assets at a loss or in a negligent manner (or put them beyond creditorrsquos reach)or

(iv) the debtorrsquos failure to pay (during the three-month period preceding the filing for Insolvency) its taxliabilities social security obligations or salary and other monetary employment obligations

(v) misuse of customer money before the company files for insolvency or questionable payments


There are no political factors involved aside from the effects or consequences that certain bailouts theSpanish Government will implement in Spain may cause on distressed companies not benefiting fromsate support since they will be treated in a different manner (The Spanish Insolvency Law 2003 doesnot provide any specific mechanism of state support)

3 Creditor issues


The court declaration of insolvency that starts the formal procedure determines an automatic stay in allunsecured credits until the end of the procedure and interest ceases to accrue with very limitedexceptions


Provided that insolvency proceedings have not begun [also see letter g) above] any creditor can bringthe following civil actions against the debtor

324

i Declarative ordinary proceedings (juicio declarativo ordinario) These are used to obtain an orderto make the debtor comply with a particular ruling or to seize the debtors assets for an amount sufficientto let the creditor recover the debt owed and claim for damages Court resolutions can be enforcedimmediately

ii Fast-track or monitory proceedings (proceso monitorio) These are fast-track proceedings thatallow the creditor to recover an unlimited amount provided the debt is stated in a document (egnormally an invoice)

iii Special proceedings for bills of exchange (juicio cambiario) This is an action used to recoverdebts that are covered by bills of exchange cheques or promissory notes

iv Special proceedings to execute unpaid pledges and mortgages (procedimiento de ejecucioacuten sobrebienes hipotecados o pignorados) This is a procedure used to enforce mortgages or pledges overassets or credits It can be started even if the debtor is involved in insolvency proceedings but receiversmay ask for a stay of a year if the affected property is used to carry out the business or activity of thecompany


Set-off will not apply during the insolvency proceedings as laid down in article 58 of SpanishInsolvency Law 2003 However set-offs will operate when their requirements existed prior to theinsolvency Court declaration This is regardless of the court or administrative decision acknowledgingthe set-off having been rendered after the insolvency Court declaration


Inter-company debt will be treated as a subordinated credit (as opposed to an ordinary credit) if certainlegal requirements are not met such as not entering the relevant loan agreement into the Contract Bookof the company

If the Refinancing Agreement12 affects a group of companies the percentage required to attain anagreement (60 of the debtorrsquos liabilities) must be calculated both on an individual basis by referenceto each group company and on a consolidated basis by reference to the claims of each group This 60of the debtorrsquos liabilities will not under any circumstances include intercompany loans

Special consideration must be made to creditors that have the status of a lsquoperson with a specialconnectionrsquo according to Article 932 (subordinated credits)

[13] See Annex 1 (article 71 bis1)


Creditors are entitled to file a petition for the declaration of insolvency of company affiliates if theybelong to the same group of companies as laid down by Law 382011 before cited


There is no ldquocreditor committeerdquo in Spanish Insolvency Law 2003 as such

Law 382011 aforementioned establish that legal entities can now be appointed receivers orinsolvency administrators and as a general rule one receiver (instead of three) will be appointed ineach insolvency proceeding by the court from different pools except in cases when the proceeding is

325

especially important (concursos de especial trascendencia) due to the number of creditors annualturnover employees etc (as set forth in article 27 bis of Spanish Insolvency Law 2003) in which casethe Court may appoint a creditor from the upper third part of credits in terms of amount

The receiver or insolvency administrator is a technical body appointed by the judge which reports toand works with the latter defends the interests of creditors and manages the equity of the debtor Itsduties involve the acts undertaken by the debtor in exercising hisher powers or replacing the debtorwhen heshe has been suspended in that year drawing up the report relating to the insolvencyproceedings to include the inventory of available assets the list of creditors and in its case theevaluation of the proposed agreement presented



The insolvency administrator(s) take over management when the Court so decides ndashmore commonly increditorsrsquo initiated procedures ie Necessary Insolvencymdash and in the remaining cases they overseecurrent management and have to authorize all transactions outside day-to-day business of the firm


Save incentives placed for fresh money in the context of a Refinancing Agreements (see Annex 1below) it is very difficult that debtor obtains finance from third parties after the insolvency proceedingsare requested at Court The company may have to rely on the soundness of its financials at the moment itenters the insolvency procedure and the capability of generating return from its ongoing business


Aside from out-of-court restructurings by introducing the privilege granted to new lending or lsquonewmoneyrsquo in the context of Refinancing Agreements the Spanish legislator has not yet included acomprehensive post-petition financing regulation within the Spanish insolvency legal frameworkTherefore the Spanish Insolvency Law 2003 still does not have a legal regime that provides incentivesfor post-petition financing and that facilitates debtorsrsquo access to liquidity through a streamlinedprocedure at the early stages of insolvency proceedings (such as the ldquodebtor-in-possessionrdquo ndashDIPmdashfinancing under the US Bankruptcy Code)


The procedure determines a stay both for unsecured and secured creditors with the exception ofemployees for certain amounts

Employeersquos salaries and wages are considered as creditors with general privileges (creacuteditos conprivilegio general) See section 5 below


As stated above contracts with mutual obligations that have not yet been performed remain in forcealthough the creditor can request termination of the contracts before the Court if the company defaults(Clauses allowing a contract to be terminated in cases of insolvency are null and void per article 61 ofSpanish Insolvency Law 2003)

326



The insolvency administrators or receivers must draw up a list of creditors in which the claims on thedebtor are recognized and ranked within two months of the opening of the insolvency proceeding Priorto this the creditors must lodge their claims within the month following publication of the openingof the insolvency proceeding They must do so by sending a signed letter to the administratorstogether with the invoice or other document providing evidence of the claim If the creditor fails tolodge his claim within the specified period it may be demoted from its original classification andclassified as subordinated debt Communication of credits may be made by electronic means


As stated above the creditors must lodge their claims within the month following publication of theopening of the insolvency proceeding

The administrators (receivers) must consider not only the claims lodged but also any claims which cameto their knowledge during their examination of the debtorrsquos accounts Claims recognized by judgments oradministrative certificates cannot be disputed although their classification may be challenged


Per Spanish Insolvency Law 2003 creditorsrsquo claims are ranked in the following categories (privilegedordinary and subordinated)

1 Privileged creditors (creacuteditos privilegiados) These creditors are divided into two subcategories

Creditors with special privileges (creacuteditos con privilegio especial)

I construction or repair creditors (creacuteditos refaccionarios)

II creditors with rights in property (limited to the secured amount)

III creditors under financial lease agreements or sale and purchase agreements where the debtorrepays the debt in installments

IV creditors with interests in book-entry securities

V creditors to whom property has been transferred

Creditors with general privileges (creacuteditos con privilegio general)

I employees owed wages who do not have special privileges

II employees with indemnities arising from the termination of employment contracts workplaceaccidents and professional illnesses as well as debts owed for breaches of occupational healthand safety obligations (if accrued before the declaration of insolvency)

III employees owed amounts relating to tax and social security withholdings

327

IV contractors and authors of intellectual property works who have assigned exploitation rights intheir work in return for payment if accrued in the six months before declaration of insolvency

V employees with up to 50 of the amounts owing on tax and social security claims as well as anyother public debts if they do not enjoy any other preferential treatment

VI claims for non-contractual civil liability

VII creditors with up to 50 of the debt owed who petitioned for the insolvency of the debtorprovided the relevant debt owed is not subordinated

2 Ordinary creditors (creacuteditos ordinarios) Creditors with debts that cannot be classed as privilegedor subordinated are ordinary debts

3 Subordinated creditors (creacuteditos subordinados) Creditors with debts which are consideredsubordinated debts namely

I credits reported late or inappropriately

II treated as subordinated as a result of a contractual agreement such as participative orsubordinated loans

III relating to an interest of any kind except those arising from rights in property up to the limitstated in the guarantee

IV owed to shareholders holding at least 5 (for companies listed on a recognized stockexchange) or 10 (for unlisted companies) of the companys share capital or by any person relatedto the creditor (art 93 Spanish Insolvency Law 2003)

V relating to any claim made in bad faith

4 Credits against the insolvency estate (creacuteditos contra la masa) Credits different from the formerthat arise after the declaration of insolvency and must be paid on maturity

I credits for salaries for the last 30 days accrued before the declaration of insolvency on amountnot exceeding twice the minimum wage (EUR64530 per month)14

II legal costs and necessary expenses for the application and declaration of insolvency and theassistance and representation of the insolvent and the administrator throughout the proceeding

III alimony of the debtor and the people to whom he had a legal duty to provide it

IV credits generated by the practice of professional or business activity of the debtor after thedeclaration of insolvency including wage debts severance pay and termination of employmentcontacts

V 50 of the credits involving new cash revenue granted under a refinancing agreement (freshmoney)


The Spanish Insolvency Law 2003 does not provide for any other method for claims filing Complexity

328

issues may arise in claims stemming from foreign concurrent proceedings relating to the same group ofcompanies in which case receivers in Spanish insolvency proceedings must co-operate with receiversin the foreign proceedings

[14]The last 30 days wages owed to employees have priority over any other debt owed including those relating to mortgages or any other creditors with rightsin property



As from March 2014 cram-down is no longer based on the type of creditor (financial institutions) buton the type of liability (financial liabilities which pursuant to Spanish Accountancy regulations arealmost all liabilities subject to a term) The result of this change is a significant increase in the scope ofcreditors that may be affected by a cram-down Liabilities derived from commercial relationships (iedebts of suppliers) and public-law credits are expressly excluded

The majority threshold to approve an agreement is lowered from 55 to 51 without counting theldquopersons having a special relationship with the debtorrdquo to form such majority Notwithstandingachieving such majority will protect the agreement against a possible claw-back action and grantpreferential ranking to the fresh money injected but will not grant the agreement the cram-down effectvis-agrave-vis opposing creditors Specific majorities are required depending on the content of the agreementfor such purpose (see Annex 1 below)


As regards the insolvency procedure once a creditorsrsquo agreement proposal (ldquoconveniordquo) has beentotally performed and term to file any non-compliance petition of two months has elapsed oralternatively all assets have been distributed to creditors the Court will render a resolution decidingon the termination of the insolvency procedure

If neither the debtor nor a creditor proposes a composition agreement or if no proposal is approved bythe required majority at the creditorsrsquo meeting or by the court the court will declare the liquidation ofthe debtor formally concluding the insolvency proceedings

If the debtor breaches the terms of the Refinancing Agreement or the creditorrsquos agreement proposal anycreditor may apply to the Court for the declaration of non-compliance If the Court declares the non-compliance either the

Refinancing Agreement or the creditorrsquos agreement proposal will be rescinded and creditors may file apetition for insolvency or start enforcement proceedings


We understand the cram-down described above will have little relevance in practice because it cannotbe applied to secured creditors which is usually the case with all financial creditors



329

See section 2 above


Pre-packed sales (similar sales regulated under UK law) may be considered within insolvencyproceedings (whether or not within the liquidation phase) as they are probably the most effective way tomaximize the debtorrsquos assets proceeds of sale However the Spanish Insolvency Law 2003 remainsunclear in particular as to whether the subrogation of Social Security claims is mandatory or not Therehave been contradictory court rulings in this regard and the consequences may be quite material



Regulation (EC) 13462000 on insolvency proceedings (Insolvency Regulation) applies in SpainSpain is also party to the United Nations Commission on International Trade Law (UNCITRAL) ModelLaw on Cross-Border Insolvency 1997 and the Insolvency Act incorporates this


The declaration of insolvency must without further formalities produce the same effects in any othermember state that would apply under the law of the state where the proceedings began (article 17Insolvency Regulation) This means that court decisions in one member state concerning the openingconduct and closure of insolvency proceedings must be immediately and automatically recognized by allother member states

However the Insolvency Act requires foreign judgments to comply with certain formalities (under theexequatur procedure) before they can be recognized (article 220 Spanish Insolvency Law -Reconocimiento de la resolucioacuten de apertura-) including that the

(i) Insolvency has been declared by a foreign court

(ii) Foreign courts decision is final and binding

(iii) Decision is adopted by the court where the debtors COMI is located

(iv) Decision is not illegal under Spanish law

Generally Spanish courts are required to apply reciprocity when recognizing foreign insolvencydecisions

330

Switzerland

David Kaumlnzig Partner Markus Alder Partner Thouvenin rechtsanwaumllte

wwwthouvenincom email dkaenzigthouvenincom malderthouvenincom tel +41 44 421 45 45



A creditor may take security over certain movable (tangible) assets by taking possession of such assets(pledge) Unlike other jurisdictions there is no floating charge (non possessory charge) over tangibleassets in Switzerland There is no register for security interests in Switzerland other than for charges onreal estate registered in the land register purchase money security interest (goods sold under a retentionof title) air crafts and vessels

Tangible assets may be transferred to the creditor also by way of title transfer (unlimited right in rem) inwhich case the creditor is under a contractual obligation to retransfer the assets (fiduciary transfer) orequivalent assets in the case of fungibles (pignus irregulare) back to the debtor upon satisfaction of thesecured obligation In both cases it is of paramount importance for the perfection of the pledge or titletransfer that the debtor no longer retains control over the assets and that effective possession istransferred to the secured party or its agent

The debtor may also assign all or certain of its receivables (existing and future) or other rights(intellectual property rights) as a security (limited right in rem) or by way of a full transfer (titletransfer) In the case of a full transfer of title the creditor is under a contractual obligation to reassign thereceivables or other rights back to the debtor upon full satisfaction of the secured obligation

Special methods for creating a security interest exist for securities held with an intermediary In thesecases a non possessory security interest of part or all of the securities held with a particular financialintermediary is also permitted under Swiss law


In General

Conveyances by the debtor prior to the declaration of insolvency which lead to reduction of the debtorsassets may be challenged according to Art 285 to 292 Swiss Debt Collection and Bankruptcy Act

Such action must relate to a period during which it is suspected that the debtor already knew or shouldhave known that such acts will prejudice other creditors or result in an undue preference This period(suspect period) is one year prior to the opening of bankruptcy or approval of a bankruptcyreorganization In case of fraudulent transfers the period is five years

Actions for avoidance must be brought within a period of two years from the day of the certificate ofdefault in the case of special execution the date of insolvency declaration or confirmation of thecomposition plan with assignment of assets Under the revised act the statute of limitation can beinterrupted andor waived

331

Conveyances and transactions during a moratorium are immune from such challenges provided they havebeen ratified by the court or creditors committee

The law distinguishes between the following transactions

Gifts

Gifts may be challenged during the one year suspect period irrespective of whether the creditor was atthe time the gift was made already overindebted

Transactions when company is overindebted

In case of over indebtedness of the creditor the law distinguishes between bull Collateralization of pre-existing debt which the debtor was not required to provide bull Satisfaction of a monetary claim byunusual means and bull Satisfaction of a claim which has not matured

Such acts may be challenged during the suspect period In addition the debtor must have beenoverindebted at the time of such actions The creditor may defend itself by proving that at the time of theaction it was not aware nor should it have known of the financial difficulties of the debtor

Fraudulent conveyances

All acts undertaken by the debtor which the creditor knew or should have known would prej-udiceother creditors may be challenged In the case of a related party transaction (which includestransactions between affiliated companies) the defendant must prove that it could not have known of thedebtors intent to act to detriment of other creditors

Effect of successful avoidance actions

A successful challenge of the above transfers will lead to the avoidance of the transaction to the extentrequired to satisfy the other creditors In case of a successful challenge the favored creditor will haveto return to the extent available the benefits received If the creditor has provided a benefit to thedebtor he is entitled to a reimbursement of such benefit to the extent the estate is still enriched

The same proceedings apply to special regulated entities such as banks insurance compa-nies andbroker dealers

Avoidable actions if successfully challenged will generally only lead to an obligation for resti-tution inmoney ie the transfer of the assets as such to the creditor is not reversed in rem


Where the companys most recent balance sheet shows that the companys assets do not cover itsliabilities (balance sheet test) or the company is not able to pay its debts as they fall due (liquidity test)the board of directors is under an obligation to call an extraordinary shareholders meeting and to comeforward with a restructuring proposal

In case no restructuring can be achieved the board is under an obligation to notify the bank-ruptcy judgeFailure to do so may lead to personal liability of the members of the board of directors for any damagecaused to the creditors as a consequence of the delay in filing for insolvency

Usually a period of 1 - 3 months must be granted to the board of directors and the board is well advisedto meticulously document its efforts to save the company from insolvency In the case of insolvency the

332

directors liability claim is an asset of the insolvency estate Only to the extent the estate does not pursuesuch action may a creditor request the insolvency estate to authorize the creditor to bring the directorsliability claim at its own costs and risk The proceeds if any derived therefrom will be reserved in thefirst place for the creditor bringing the action Any surplus falls into the estate

2 Taking action


Where the company is insolvent on a balance sheet or liquidity test the board of directors is under anobligation to inform the bankruptcy judge Such action may also be taken by the companys auditors

In its filing the company may motion for outright bankruptcy apply for a provisional morato-rium makean application for a maturity postponement or apply for a bankruptcy postpone-ment

The effect of the provisional moratorium basically is that bankruptcy proceedings may not be initiatedand that the statute of limitations are tolled to the exception of privileged claims and claims secured by apledge on real estate Further the effect of the provisional moratorium is that interest stops to accrue onall unsecured claims upon the granting of the provisional moratorium The period of the provisionalmoratorium is usually used to prepare a composi-tion plan In rare circumstances the court may deferfrom designating a provisional trustee Under the revised act upon application of the debtor the grantingof the provisional morato-rium must not be published If the provisional moratorium is not published thecourt must to designate a provisional trustee This change introduced with the most recent revision of theact namely that the provisional moratorium must not be published is designed to permit an applicant torestructure its balance sheet and negotiate with the creditors without the pressure of the publicity of alooming insolvency The granting of the provisional moratorium and the designation of a provisionaltrustee cannot be appealed

After the expiration of the provisional moratorium and if the Debt Restructuring Judge is of the view thata composition plan or reorganization of the company is likely to be achieved a definite moratorium canbe granted for an additional period of four to six months and the Debt Restructuring Judge will designatethe trustee and if found adequate a creditors committee may be established Upon request of the trusteethe moratorium may be extended to 12 or a maximum of 24 months The decision on the moratorium maybe appealed In the case of a rejection of the moratorium an appeal has no suspensive effect

The granting of the moratorium will be published

During the moratorium the debtor may continue its business activities under the auspices of the trusteeThe Debt Restructuring Judge may however order that certain actions require the consent of the trusteeor authorize the trustee to take over the management instead of the distressed debtor

During the period of the moratorium without the consent of the Debt Restructuring Judge the debtor maynot validly transfer and sell its assets grant securities or guarantees or make transactions withoutconsideration

During the moratorium the trustee will have to supervise the business activities and to draw up aninventory In addition the trustee will request the creditors by way of publication to lodge their claimswith the debtor Upon preparation of the composition plan the trustee will call a creditors meeting Atsuch creditors meeting the trustee reports upon the financial condition of the company and submits thedraft composition plan for approval in writing

333


The company may seek to come to a private debt arrangement These private arrangements can include adebt waiver maturity postponement or a debt equity swap with the goal to restructure the companysbalance sheet such that the company is no longer insolvent In a private debt arrangement there is nopossibility to force a creditor to reduce its obligations against the company Such private debtarrangement however is possible only before the declaration of insolvency Upon insolvency a privatedebt arrangement will be replaced by a composition plan Given that under the revised act a moratoriummust not be published a private debt arrangement may also be negotiated under the provisionalmoratorium


There is no general answer to this question since this depends upon the type of insolvency situation(over indebtedness vs liquidity) and the prospects of the company to continue all or part of its businessWhere the Company has a liquidity squeeze a moratorium may be the best alternative permitting theCompany to seek new capital or liquidate certain of its assets under the protection of the moratorium

Usually a composition plan (Nachlassvertrag) gives the administrator and the creditors committeemore flexibility in the winding down of the operations and the liquidation of the assets and therefore thechances to increase the proceeds available for satisfaction of the insolvency creditors are usually betterthan in the case of bankruptcy where the operations are shut down and all assets liquidated


Insolvency is triggered by over indebtedness (balance sheet test) or the inability of the com-pany tofulfill its obligations as they fall due (liquidity test) Insolvency is declared by the court uponapplication of the company the auditors or a creditor


Insolvency proceedings are usually initiated by the companys board by filing an application with theinsolvency judge The insolvency filing must be accompanied by a (audited) balance sheet on a goingconcern and liquidation basis where the company is subject to an audit


In addition to the board an insolvency filing can also be initiated by the companys auditors as well asby a creditor without having to pursue a preliminary debt collection proceeding where the company hasadmitted that it is unable to pay its debts as they fall due

A creditor whose claim has remained unsatisfied after the filing of payment summons against thecompany (Schuldbetreibung) may request opening of insolvency by requesting a continuance if thecreditors objection - if any - has been finally set aside by the competent court Please note that asecured creditor may not request continuance by way of bankruptcy but only by way of special executionof the collateral

Only for the uncovered portion may a secured creditor apply for insolvency continuation It is thereforerecommend excluding in security contracts the right of the debtor to first request special execution of thecollateral (waiver of the beneficium excusionis realis)


The court (in case of regulated financial institutions the Swiss Financial Market Supervisory Authority

334

(FINMA)) is in charge of declaring the company insolvent or to grant a moratorium The insolvencyoffice then proceeds with the necessary protective measures to secure the companys assets requests thecreditors to file their claims and invites them to the first creditors meeting

At the first creditors meeting the creditors will be able to designate an alternative administrator toreplace the bankruptcy office which is usually done in larger and complex cases Also the creditors mayelect the members of the creditors committee and allocate the powers between the administrator and thecreditors committee

Upon request either the distressed debtor or a creditor may petition the bankruptcy court for the grantingof a provisional moratorium The debtors petition must contain an updated balance sheet profit and lossstatement liquidity planning or comparable documents permitting an assessment of the applicantscurrent and future financial situation and revenue as well as provisional restructuring plan

Upon receipt of the petition the Debt Restructuring Judge will take such actions as necessary toconserve the assets of the distressed debtor grant a provisional moratorium and appoint a provisionaltrustee who assesses the financial situation of the debtor and the prospects of a reorganization orcomposition

The provisional moratorium may be extended to a maximum of four months Where it is obvious that norestructuring will be possible the restructuring judge will declare bankruptcy Should it becomeapparent during the provisional moratorium that a restructuring of the company or a composition planmay be achieved the restructuring judge will grant a definitive moratorium A careful preparation of thefiling and the verification of the figures presented are of utmost importance for a successful application

A composition plan is approved if a majority of the creditors representing at least 23 of the outstandingclaims or 14 of the creditors representing at least 34 of the outstanding claims consent to thereorganization plan The composition plan will further have to be approved by the bankruptcy judgeThe decision of the Debt Restructuring Judge may be appealed within 10 days from its decision Suchdecision may be further appealed to the Swiss Federal Supreme Court If no appeal has been filed andthe decision of the Debt Restructuring Judge regarding approval of the composition plan has becomevalid and enforceable the composition plan and the transaction set forth therein may be consummated

In case the composition plan is rejected by the creditors or not accepted by the bankruptcy judge anycreditor may request the immediate opening of bankruptcy proceedings


The insolvency proceeding can take anywhere from one to several years depending upon how complexthe situation is For instance the Swissair insolvency which commenced in 2001 is still not fully settledClaims filed by the insolvency estate or against the insolvency estate may take several years and maytherefore prevent the termination of the insolvency for over a decade

In these cases it is customary provided the financial situation permits this to make payments on accountto the creditors whose claims have been finally accepted The authorization to provide for such interimpayments lies with the creditors committee


The declaration of the insolvency will be published in the Swiss Commercial Gazette and the creditorswill be invited to file their claims with the competent insolvency office within one month of thepublication Third parties as well as creditors having assets belonging to the insolvent party arerequested to transfer such assets to the insolvency estate failing which they might be subject to criminal

335

prosecution Debtors of the insolvent party will also be required to notify the insolvency estate withinthe same period


Upon declaration of the insolvency the company looses its ability to dispose over its assets Interestceases to accrue except to the extent interest is secured by collateral Debt collection proceedings arestayed This applies in principle also to a moratorium


The concept of debtor in possession applies in the case the opening of insolvency is postponed by thejudge in the case of an application by the debtor based upon Art 725a Swiss Code of Obligations aswell as the moratorium The debtor as well as a creditor may motion for a bankruptcy postponement ormoratorium in case there is a substantial likelihood that the company can be restructured The insolvencyjudge may designate an administrator who supervises the board of directors and limits the authority ofthe board of directors or makes such authority subject to the administrators consent The judge willdetermine the obligations of the administrator A bankruptcy postponement as well as the provisionalmoratorium will be published only if this is necessary for the protection of third parties Whether or nota publication will be necessary depends largely on the cash flow generated Where the cash-flow issufficient to cover the ongoing costs of the company running under the moratorium then arguably thirdparty creditors will not be prejudiced by a moratorium or bankruptcy postponement


The designation of a creditors committee is crucial in larger insolvency or restructuring pro-ceedings Itis therefore advised to consult with likely minded co-creditors in advance of the first creditors meetingin order to secure a place on the creditors committee Also the selec-tion of the external insolvencyadministrator can be crucial Again we recommend to select the external insolvency administratorcarefully together with the other like minded creditors and to secure their consent Please note that it isnot permitted to buy the votes of other creditors or to offer them other benefits in order to secure theirvotes for the designation of the insolvency administrator or the representation on the creditorscommittee


Although there is no nationality requirement for the election to the creditors committee it isrecommended to designate a Swiss resident person as a member with expertise in corporate contractlitigation andor insolvency law matters

3 Creditor issues


Unsecured creditors are reduced to the right to receive their respective share in the insolvencyproceeds With the insolvency declaration and the publication of a moratorium collection and debtenforcement proceedings are stayed and interest stops to accrue unless the composition plan willprovide otherwise


336

In bankruptcy proceedings the entire estate of the debtor no matter where the assets are located will beliquidated and the proceeds distributed amongst all creditors in accordance with their privileges1

Upon the opening of bankruptcy proceedings all attachable assets owned by the bankrupt at the time ofthe opening of such bankruptcy proceedings will form irrespective of their location one single estateAssets which accrue to the debtor during the bankruptcy proceedings will also form part of such estate

The opening of bankruptcy proceedings stays all enforcement proceedings against the debt-or includingthose for the foreclosure on collateral provided by the debtor and no new enforcement proceedingsrelating to claims which arose prior to the opening of bankruptcy will be permitted The incomereceived by an individual from a gainful activity after the opening of private bankruptcy and assets in thepossession of the bankrupt belonging to third parties do not form part of the bankrupts estate Thirdparties may request the segregation of their property from the bankrupts estate

In addition where the bankrupt has acted as agent the principal has a right to request segregation ofthose tangibles which the agent has acquired in its own name but for the benefit of the principal (Art401 para 3 Swiss Code of Obligations) According to the prevailing opinion the principal may alsobased upon the same provision request segregation of the goods entrusted to the agent However in caseof banks such segregation is now explicitly provided for in Art 16 and 37 b of the Federal Banking Actin respect of tangible property and securities transferred by the banks customer to the bank

The bankruptcy estate will be liquidated by the administrator in bankruptcy and the proceeds from suchliquidation will be distributed among the creditors in accordance with their privileges (priority rights)

Please note that pursuant to Swiss law collateral pledged (limited right in rem as opposed to full titletransfer) by the debtor forms part of the bankruptcy estate and will be liquidated together with the otherassets even where the agreement with the secured party provides that the secured party may itselfproceed with the liquidation of such collateral (see BGE 116 III 26) However such creditor is entitledto receive the proceeds from the liquidation of such collateral up to the amount of its claim Anexception to this general principle applies to banks and security dealers regulated in Switzerland whomay liquidate the collateral even after the insolvency declaration

1 According to Art 39 Debt Enforcement and Bankruptcy Act the following individuals or entitiesregistered in the Commercial Register are subject to bankruptcy proceedings sole enterprise memberof a registered partnership unlimited liability partner of a limited partnership unlimited partner of acorporation with unlimited partners managing member of a limited liability company generalpartnership limited partnership stock corporation or corporation with unlimited partners limitedliability company cooperative foundation and association

2Please note however that the Swiss Federal Supreme Court has held differently in its decision 117 II492

3Art 37 b para 1 of the Federal Banking Act provides that the deposits set forth in Art 16 do not fallinto the bankruptcy estate but will be segregated in favor of the banks customer Similarly deposits ofthe bank with third parties are presumed to belong to the banks customer and will be segregatedaccordingly Deposits within the meaning of Art 37 b are

1Tangible property and securities of the deposit account holder

2Tangible property securities and claims to which the bank has fiduciary title for the account of theircustomer

337

3Unencumbered delivery rights of the bank against third parties from cash transactions forward andfutures transactions coverage transactions and from issues for the account of the banks customer (seeArt 16 Federal Banking Act) The administrator is either the local debt collection and bankruptcy officeor in more complex cases a specifically appointed liquidator usually an accounting firm or attorney


Set off is possible provided there is mutuality maturity and similarity The creation of mutuality postinsolvency will prevent a set off Hence triangular set off will unlikely be permitted in an insolvencysituation


Intercompany liabilities are treated like other liabilities in an insolvency situation Note Loans orsecurity interests granted by a Swiss company to its foreign direct or indirect parent or affiliate mayexpose the directors to personal liability Loans extended by a related party in financial difficulty maybe subject to equitable subordination in the case of insolvency


A piercing of the corporate veil requires elements pursuant to which the creditor in good faith waspermitted to rely upon a letter of comfort or other assurances or the affiliate against which recourse issought has permitted or has created the impression that it will be jointly liable Piercing of the corporateveil must be looked at in the context of the situation the issue did arise


A creditors committee will be established unless there is a summary insolvency proceeding The firstcreditors meeting in general determines the authority of the creditors committee The creditorscommittee has the following authority

(i) General surveillance of the office of the insolvency administrator

(ii) Review of questions submitted to the committee by the insolvency administrator

(iii) File appeal against decisions of the insolvency administrator

(iv) Decision as to the continuance of business operations unless the creditors has resolved thecontinuance

(v) Approval of obligations incurred by the estate (as opposed to pre insolvency filing obligations)

(vi) Decision on continuance or the commencement of legal actions

(vii) The granting of the authority to enter into a settlement agreement

(viii) 8 The first creditors meeting may further authorize the creditors committee to give instructions tothe administrator to dispose of the assets by way of private sale as op-posed to a public auction towaive claims of the estate subject to them being offered to a requesting creditor

(ix) Contest and challenge creditors claims filed

(x) Authorize interim payments on account for the creditors

338

(xi) Call further creditors meetings



Upon declaration of insolvency or moratorium the control over the company is in the hands of theinsolvency administrator or trustee and after the first creditors meeting in the hand of the creditorsmeeting


The estate is usually financed from its own assets and the proceeds derived there from Where thecompany continues its business under the auspices of a trustee new debts incurred by the company willbenefit from a super priority right


In case of an insolvency postponement or moratorium the company may seek financing from thirdparties Also in case of a composition plan the insolvency administrator may - with the approval of thecreditors committee - seek financing for the continuing operations of the estate Such financing willbenefit from a super priority right


Insolvency does not per se terminate the employment contracts However an employee may terminate theemployment agreement in case hisher salary is not paid or secured Claims of employees arising out ofemployment agreements for unpaid wages for the six month period prior to the declaration of bankruptcyand claims of employees arising out of the termination of employment agreements as a consequence ofbankruptcy have priority over unsecured third party claims


Acceleration and monetization of claims against the bankrupt party

In accordance with Art 208 Swiss Debt Collection and Bankruptcy Act upon the declaration ofbankruptcy all obligations of the debtor become automatically due (acceleration) with the exceptionof these obligations which are secured by a mortgage on real estate

Obligations which are not for the payment of a sum of money will be converted into an obligation for thepayment of money (monetization)

No automatic termination of contracts due to bankruptcy of one party

Under Swiss law bankruptcy of one contractual party does not in general lead to the termination of thecontract unless the contract provides so Thus absent an automatic termination clause the contract willhave to be terminated either in accordance with the provisions of the law or the contractual provisionsCreditors claims under contracts subject to a fixed term or terminable upon notice may only be made upto the time of expiry or the earliest possible termination date To the extent the estate makes use of theservices or delivery from such contracts during the insolvency the consideration owed for such deliveryor services forms part of the liability of the estate and thus benefit from a super priority

339

Cherry picking by bankruptcy trustee

However according to Art 211 para 2 Bankruptcy Act the administration in bankruptcy may at its solediscretion chose to fulfill any agreements entered into by the debtor In case of the assumption of thecontract by the trustee the other party can request the granting of adequate security

This right which in principle allows the administration in bankruptcy to fulfill only those con-tractswhich are advantageous to the debtor (cherry picking) has been recently abolished by an amendment tothe Bankruptcy Act (Art 211 para 2bis) for a certain type of transactions This amendment stipulatesthat where the agreements provide for delivery on a fixed term as well as for financial futures swapsand option agreements and where the contract value can be assessed according to market values thecounter-party as well as the administration in bankruptcy are entitled to terminate such agreements andclaim the difference between the agreed value of the contract and the market value at the time of thedeclaration of bankruptcy (close out and netting)



Claims must be filed with the insolvency office within one month from the publication of the insolvencyand the request to the creditors to file their claims In the case of regulated financial institutions claimson the book of the regulated financial institution are deemed filed Failing to file within the time limitprescribed does not lead to a forfeiture of the claim how-ever in case the insolvency office oradministrator has already published the creditors ledger the costs for republishing the creditors ledgermay be imposed upon the late filing creditor Also in the case of interim distributions the late filingcreditor will not benefit from these payments on account


One month from the publication of the request for filing in the Swiss Commercial Gazzette


Unsecured creditors are divided into the following priority classes

First priority class

Claims of employees arising out of employment agreements for unpaid wages for the six months periodprior to the declaration of bankruptcy and claims of employees arising out of the termination ofemployment agreements as a consequence of bankruptcy

Second priority class

Claims of children against their parents in connection with the administration of their assets

Third priority class

All other claims


340

In larger insolvencies the insolvency administrator will often prepare forms to be used by the creditorsfor the filing of their claims However there is no obligation to use these forms



In connection with a composition plan a unsecured creditor can be required (against his own will) toaccept only a partial satisfaction of its claims The composition plan is approved if a majority of thecreditors representing at least 23 of the outstanding claims or 14 of the creditors representing at least34 of the outstanding claims consent to the composition plan

The reorganization plan will further have to be approved by the bankruptcy judge The deci-sion of theDebt Restructuring Judge may be appealed within 10 days from its decision Such decision may befurther appealed to the Swiss Federal Supreme Court


Following the distribution the administration in bankruptcy submits its final report to the bank-ruptcyjudge in order to declare the bankruptcy proceedings closed The closing of the bankruptcy proceedingswill be publicly announced

Should - after the close of the bankruptcy proceedings - assets be discovered which belong to thebankrupt estate but which were not included therein the bankruptcy enforcement office takes possessionof them and without further formalities attends to realization and distribution of the proceeds to thecreditors who suffered a shortfall in their respective order


In general unsecured creditors can not expect more than 3 - 10 on the face amount of their claims



Private debt arrangements with the creditors


No unless the creditors can come forward with a pre-agreed restructuring proposal which howeverwill still need to be approved by the restructuring judge and the creditors A pre-packaged compositionplan may however greatly reduce the time of the moratorium and therefore accelerate the entireproceeding



341

Swiss insolvency laws apply to foreign entities provided such foreign entities have assets located inSwitzerland In case of bankruptcy of a debtor located outside of Switzerland the declaration ofbankruptcy of a foreign authority at the domicile of the debtor will be recog-nized in Switzerland inaccordance with Art 166 Swiss Private International Law Act provided the decree is enforceabledoes not violate Swiss ordre public and the country of origin of the decree applies the principle ofreciprocity A foreign insolvency administrator is not competent to file claims against a Swiss debtor orcollect assets located in Switzerland except where the foreign insolvency has been recognized inSwitzerland by way of a formal procedure and in which case it will be the Swiss insolvency office thatwill be competent for the collection of assets and the filing of claims (if any)

In case of recognition of the foreign bankruptcy decree the local insolvency authorities will proceed toa bankruptcy proceeding in relation to the assets located in Switzerland (Art 170 Swiss PrivateInternational Law Act) The Swiss bankruptcy authorities will establish a limited creditors plan whichcontains the secured claims and the non-secured claims of creditors domiciled in Switzerland

Conversely however an insolvency of a Swiss resident debtor company extends to all of its assetswherever located and the Swiss insolvency administrator is entitled to collect also the assets locatedoutside the Swiss jurisdiction Whether such a long arm authority of the Swiss insolvency administratorwill be recognized at the place where the assets are located will depend upon the law applicable wheresuch assets are located


(see above) Reciprocity is usually demonstrated to the court by providing a legal opinion from theSwiss Institute of Comparative Law as an independent expert

342

Tunisia

Sami Kallel Partner Kallel amp Associates

wwwkallelassociatestn email skallelkallelassociatescomtn tel + 216 71 280 017

While drafting our responses we relied upon the following legal texts

bull Law ndeg 95-34 of April 17th 1995 on Receivership of Enterprises in Financial difficulties assubsequently amended and completed respectively by Law ndeg99-63 of July 15th 1999 an by Law ndeg2003-79 of December 29th 2003 (ldquoLaw on Receivershiprdquo)

bull Code of Commercial Companies promulgated by Law ndeg2000-93 of November 3rd 2000 assubsequently amended and completed (ldquoCCCrdquo)

bull Code of Commerce promulgated by Law ndeg59-129 of October 5th 1959 as subsequently amended andcompleted

bull Code of Private International Law promulgated by Law ndeg98-97 of November 27th 1998

As a preliminary observation we draw your attention that any translation into English of any legalprovision should be understood as being an informal translation the Arabic version is the only officialand binding version



1 Before the beginning of insolvency proceeding

The Tunisian legislation into force for enterprises in economic difficulties did not provide for specialmeasures for creditors to take securities over assets The procedures for petition and enforcement doapply

2 If an insolvency proceeding is opened

(i) If an amicable settlement is opened

The claiming of assets for non payment of debts may be suspended If so debtors cannot take securityover assets during the proceedings

However creditors which debts arose after the beginning of the amicable settlement may in any casetake security over assets

(ii) If a judiciary settlement is opened

The claiming of assets for non payment of debts is suspended during the period of observation Debtorscannot take security over assets during the proceedings

343


(iii) If a bankruptcy proceeding is opened

The claiming of assets for non payment of debts is suspended for the mass of creditors who cannot takesecurity over assets during the proceedings


1 In case of the opening of a judiciary settlement

As per Article 30 of Law on Receivership the Tribunal may invalidate the decisions of the enterprisesas were taken before the action is being brought before the Tribunal should these decisions beinconsistent with the receivership plan as well as with any act of transfer against payment or gratuitouswhich may affect the interests of the enterprise or any operation likely to favour one creditor overanother and any payment of a debt not due yet as long as those operations are entered into executionafter the date of the enterprise suspended payment

2 In case of bankruptcy

As per Article 462 of the Code of Commerce the following actions should be declared non binding onthe mass of creditors if they were made by the debtor either from the time adjudicated by the Tribunalas the date of the suspension of payment or 20 days before that date

minus free of charge acts or transfers except for small donations of use

minus advanced payments in whatever form they have been made

minus payments of over due pecuniary debts made other than in cash such as bills of exchange promissorynotes checks transfer order and in general any giving in payment except for rights acquired by thirdparties in good faith

minus The constitution of a mortgage by agreement or through judicial means or a pledge on the debtorsproperty to secure an existing debt


1 Civil liability

As per Article 121 and 214 of the CCC when the judicial settlement or the bankruptcy revealsinsufficient assets the Tribunal may upon request of the judicial administrator of the trustee of thebankruptcy or one of the creditors decide that the debts of the company will be supported in whole or inpart with or without solidarity and up to the amount designated by the Tribunal by the manager ormanagers or de facto manager The Tribunal may also prohibit in its decision the person convictedfrom managing companies or from performing commercial activities for a fixed period

The legal or de facto manager are exempt from the aforementioned liability should he proves that he hasbrought to the management of the company all the due care of a prudent entrepreneur and a loyal agent

In case of a bankruptcy and pursuant to the provisions of Article 213 of the CCC the Tribunal maysubject the President General Manager or the General Manager or the Deputy Director General to theforfeiture legally attached to bankruptcy However they may be exempted by the Tribunal if they prove

344

that the bankruptcy is not due to serious misconduct in the management of the company In the event ofincapacity of the President General Manager to exercise his functions the Deputy Director General orthe delegated administratordirector incur within the limits of the functions they performed the liabilitydefined in this Article in lieu of the President

By virtue of Article 596 of Commercial Code in case of the bankruptcy of a company the Tribunal mayextend bankruptcy to an person who under the cover of said company hided its own acts and performedin his personal interests commercial acts and disposed of the companyrsquos assets as if these assets werehis own property

2 Criminal liability

As per Article 29 of the Law on Receivership the Director liability may be raised once it is evidencedthat the latter committed embezzlements or any offences while managing the enterprise

2 Taking action


Two procedures are available for enterprises in financial difficulties

The first procedure is that made available before the enterprise suspends payment It consists of anamicable settlement whereby the Tribunal designates a conciliator between the enterprise and itsdebtors in order to get a settlement The settlement may consist on the staggering of debts their rebatethe stopping of the calculation of the interests or other measures

The second procedure is that made available to the company once it had suspended payment Theprocedure consists in the judiciary settlement


The Tunisian legislation into force on enterprises in economic difficulties does not distinguish betweenformal and informal procedures


Article 1 of the Law on Receivership provides amongst for the continuing of the activity of theenterprise and the reimbursement of its creditors Indeed the relevant provisions of the Law onReceivership and related regulation provide for measures which are as the case may be either to thebenefit of the creditors of the enterprise or to the debtor enterprise


The trigger for insolvency is the suspension of payment


The filing process is as follows

bull Regarding the amicable settlement the filing is made before the Commission for Monitoring theEconomic Enterprises

345

bull Regarding the judiciary settlement and according to Article 19 of the Law on Receivership the filingis made before the President of the Tribunal of First Instance having jurisdiction over the main headoffice of the enterprise

The aforementioned applications should be submitted together with the required documents andinformation otherwise the application should be rejected


The following persons are enabled to apply for placing the company into insolvency proceedings

bull The owner of the enterprise when it is an individual enterprise subject to the Law on Receivership

bull The President and General Manager or the General Manager or the majority of the Board of Directorswhen it is a joint stock company with a Board of Directors

bull The President of the Management Board the Sole General Director or the majority of the Board ofManagement when it is a joint stock company with Board of Management

bull The sole shareholder when it is a limited liability company

bull The manager when it is another company

bull Every creditor who could not recover his debt by way of individual enforcement means


The extent of the court involvement can be outlined as follows

1 Once the application is filed

The President of the Tribunal of First Instance after having requested the opinion of the Commission forMonitoring the Economic Enterprises may

(i) Order the triggering of the judiciary settlement and the opening of an observation period

(ii) Decide the rejection of the application

(iii) Order the sale of the enterprise to a third party without going through an observation period when itis clear that it is the only solution for the recovery the enterprise

2 During the process of the judiciary settlement

The Tribunal may notably

(i) Suspend the procedures of prosecution and enforcement

(ii) Oust the manager and replace him by a judicial administrator

(iii) Prohibit the manager from making any further operation of transfer or pledge on his stock or shareswithout authorization

(iv) Invalidate decisions of the manager of the enterprise which were taken before the action is broughtbefore the Tribunal

346

(v) Approve the receivership plan


There is no time limit imposed by the Law on Receivership It is treated on case-by-case basis


An extract of the Tribunalrsquos decision on the opening of the period of observance is recorded on theTrade Registry a copy is communicated to the Commission for Monitoring the Economic EnterprisesThe extract has to be inserted on the Official Gazette of the Republic of Tunisia to the diligence of theclerk of the Court

The Tribunalrsquos decision on the opening of the judiciary settlement and its decision on the approval ofthe receivership as well as the judgment declaring the bankruptcy has to be recorded on the TradeRegistry A copy is communicated to the Commission for Monitoring the Economic Enterprises It ispublished on the Official Gazette of the Republic of Tunisia

The judicial administrator shall notify the labor inspection of any termination of employment contractsandor reduction of wages

The decision of transfer of the enterprise and the call for tenders is published in the Official Gazette ofthe Republic of Tunisia and by any other means decided by the supervisory judge


i Suspension of pursuits and acts of enforcement

As per article 32 of the Law on Receivership once the period of observance is opened individualpursuits and any acts of enforcement related to debts collection or any claiming of assets for nonpayment of debts are suspended Are equally suspended the rates of interests and damages and overduepayments Some exceptions though apply

ii Termination of contracts

The enterprise may request upon authorization of the judicial administrator the termination of ongoingcontracts executed with third parties clients suppliers should the latter not be necessary for its activity


Under Tunisian law and to the best of our knowledge we are not aware about any similar procedure


To the best of our knowledge we are not aware of any local law red-flags particularly relevant to asituation


We are not aware of any political factors which may come into play

3 Creditor issues

347


Unsecured creditors may be affected when the company funds and assets do not cover all the debts


i If a judiciary settlement is opened

During the observance period the claiming of assets resulting from the non payment of debts as well asthe enforcement proceedings are suspended

ii If bankruptcy is declared

Secured creditors may continue enforcement of their security


Please note that set-off does not apply except for a secured creditors in bankruptcy procedure


The Law on Receivership does not provide for any special measures in such situation


As per Article 478 of the CCC bankruptcy or receivership proceedings opened against a companyaffiliated to a group of companies can be extended to one of its affiliated companies when their assetsare confused or in case of embezzlement or abuse in the use of the companyrsquos assets subject tobankruptcy or receivership proceedings or if it is established that the debtor company is fictive or whenthe affiliated company appear to be shareholders in that company



As per Article 25 of the Law on Receivership the supervisory judge fixes the list of creditors anddesignates among them one or more representatives in order to communicate to him the creditorsrsquoobservations


Creditors are regrouped into the mass of creditors




As per article 26 of the Law on Receivership the company is controlled by the judicial administrator

ii If bankruptcy declared

348

As per article 467 of the Code of Commerce the company is controlled by the supervisory judge


The judicial administrator elaborates a receivership plan which includes the means to be implementedfor developing the company including if necessary the re-spreading of the debts the rate of reduction ofthe principal of these debts or related interests

The judicial administrator may equally suggest to change the legal form of the company or to raise itscapital He necessarily requests the views of the Commission of Monitoring of Economic Companies forthe elaboration of the plan consults the creditor representatives while taking into consideration theopinion of creditors concerning the rebate of their debts


We are not aware of a similar procedure available for the enterprise in Tunisia


As per Articles 21 36 and 38 of the Law on Receivership if the recovery of the company needs thetermination of the labor contracts or the reduction of salaries and advantages the judicial administratorinforms the Labour Inspection and waits for fifteen days the result of the conciliation procedure beforetransferring the plan to the Commission of Monitoring Economic Companies and to the official receiver

The authorized termination of a labor contract under the receivership plan is considered to be justifiedby economic and technical reasons Concerned persons preserve all their relating rights


As per Article 35 of the Law on Receivership contracts binding the company are to be continuedHowever the judicial administrator or the debtor himself may request their termination from thesupervisory judge should they deem not be necessary for the companyrsquos activity



As per Article 25 of the Law on Receivership once designated the supervisory judge fixes the list ofcreditors Creditors have to make sure that their debts have been recorded within 30 days from the dateof publication in the Official Gazette of the Republic of Tunisia of the opening of judiciary settlement

No debt may be recorded after that deadline unless authorization of the Tribunal is obtained In allcases no debt may be recorded after one year Some exceptions apply


See above


In the light of the Law on Receivership we understand that the debtors are ranked during the judiciarysettlement as follows

349

1 Super privileged creditors ie employees legal expenses made for the common interest of thecreditors for the conservation and the achievement of the common pledge

2 Creditors with new debts of the company raised from the opening of the observance period and whichare necessary to the continuing of the activity of the company as well as the rent of assets andequipments object of lease contracts which procedure of petition and for enforcement for their recoverywere suspended and which its due date is prior to the opening of the period of observance

3 Secured creditors with debts arising prior to the opening of the observance period

4 Unsecured creditors with debts arising prior to the opening of the observance period


Apart from the foregoing we are not aware of any other method



The Code of Commerce Provisions do not provide for Cram-Down procedure


The alternatives are outlined as follows

1 Decision on the continuing of the companyrsquos activity Full execution of the receivership plan orjudgment on the waiving of the enforcement of the receivership plan as the latter can no longer beenforced

2 Decision on the transfer of the company to third party Distribution of the price to the creditors by thejudge in charge of the enforcement of the Tribunalrsquos decision

3 Decision of lease or management lease of the company Payment of creditors in accordance with thereceivership plan (if not the receivership procedure may be re-opened)

4 Decision of winding up of the company Radiation of the Company from the Trade Registry

5 Declaration of bankruptcy of the company Judgment on the closing of bankruptcy


See above



We are not aware of any non-formal procedures for restructuring

350


As per Article 19 of the Law the President of the Tribunal of First Instance may decide the assignmentof the enterprise without having recourse to the observance period if it is established that this is theunique solution for restructuring the enterprise



As per Article 8 of the Code of International Private Law Tunisian jurisdiction has exclusivecompetence with regard insolvency proceedings such as restructuring or bankruptcy proceedings


We are not aware of any special recognition of foreign proceedings regarding insolvency or bankruptcyproceedings

351

Taiwan

Sheng-Chi Teng (Ms) (co-ordinator) and and Mr Willy Wang Guo Ju Law Firm

wwwguojulawfirmcomtw email willywangguojulawfirmcomtw shengchitengguojulawfirmcomtw tel +886 2 2577 6123



A creditor may take security by mortgage or lien on debtorrsquos real estate or pledge on debtorrsquos personalproperty

Furthermore with regard to a creditorrsquos monetary claims or claims exchangeable for monetary claimsin the event of the creditorrsquos showing of the impossibility or extreme difficulty to satisfy the claims bycompulsory execution in the future that creditor may apply to the court for provisional attachment overthe debtorrsquos assets for purposes of securing the satisfaction of a compulsory execution


According to the Bankruptcy Law of the ROC (Taiwan) the bankruptcy trustee has the authority torevoke the following acts which the company has taken within 6 month prior to the declaration of theinsolvency

(i) assurance that was made within 6 months prior to the declaration of the insolvency or

(ii) settlement of an undue debt


The director shall take the joint liability with the company in bankruptcy

2 Taking action


When a company is in financial difficulties resulting in its incapability of paying off its debts a creditoror the persons stipulated under the Bankruptcy Law of the ROC (Taiwan) may file for bankruptcyapplication for the company


In the event of the loss incurred by a company aggregates to one half of its paid-in capital the board ofdirectors shall convene and make a report to a meeting of shareholders

In the event that a companyrsquos gross assets are less than its total debt and are insufficient to set off itsliabilities the board of directors shall file for bankruptcy application to the court

352


(i) The creditors of the company or the company itself can place the company into the bankruptcyproceedings when the company is incapable of paying off its debts

(ii) In the event that the court finds the company is incapable of paying off its debts during any othercivil proceedings or executing proceedings the court may declare the insolvency ex officio

(iii) In the event of the aggregate assets of a company is insufficient to satisfy its liabilities during theliquidation process the liquidators shall file an application for declaration of bankruptcy


The extent of court involvement is wide At the filing of bankruptcy application the court should do thenecessary investigation and decide whether or not to grant the bankruptcy application The court shouldmake its decision within 7 days upon its receipt of the application unless an extension of another 7 daysis made on account of investigation necessity If the court decides to grant the bankruptcy application itshould appoint a bankruptcy trustee simultaneously


It depends on the nature of each case and it is hard to calculate an average term Sometimes if all thebankruptcy estates are cash only and there is no dispute between the creditors it will be faster However if the creditor committee cannot make a resolution of the method or price to liquidate thebankruptcy estates or the creditors raise objections to the distribution of the bankruptcy estates and filean opposition to the court it will take several years for the process to conclude


The court should notify all the known creditors debtors people who possess the property of theinsolvent company and the registration authorities of the insolvent company or of that companyrsquosproperty


The company as debtor can refuse any unsecured creditors who do not follow the bankruptcy process toclaim their rights Furthermore only the estates of the bankrupt company as debtor would bedistributed by the creditors who have filed their claims during the bankruptcy proceedings

3 Creditor issues


Unsecured creditorsrsquo right will be regarded as the claims in bankruptcy if they lawfully file their claimsduring the bankruptcy proceedings In other words an unsecured creditor cannot claim its right unlessit follows the bankruptcy proceeding to do so The unsecured creditors can only receive distributionfrom the bankruptcy estates


A secured creditor may exercise its security by the general execution proceedings If the result of theexecution is not enough to satisfy its right the insufficient part will be regarded as a claim in bankruptcy

353

and the creditor can join the distribution in respect of that unsatisfied part


A creditor may apply set-off regardless of the types of the debts However a creditor may not applyset-off if the debt arises after the declaration of bankruptcy


A creditor committee can be called by the court ex officio or upon the bankruptcy trusteersquos andorsupervisorrsquos application The court should appoint a chairman to preside the creditor committee Thecreditor committee may elect a supervisor decide the management of the bankruptcy estates and decidewhether the company in insolvency should keep operating or be shut down



The bankruptcy trustee


In the event that the insolvent company also stops its business or suffers an operating losses or businesscontractions such company may lay off employees with prior notice The employees of such companywill be entitled to a top-priority right in receiving up to six (6) months arrear wage which are payableunder the labor contract The employees may file the arrear wages beyond six (6) months as the claimsin bankruptcy


The contracts entered into by the insolvent company shall be performed by the bankruptcy trustee or under the approval of bankruptcy trustee In the event that a supervisor has been elected by the creditorcommittee the performance shall be approved by the supervisor

Furthermore a contract or a commercial arrangement usually stipulates that one partyrsquos insolvency is areason for the other party to terminate that contract or commercial arrangement Therefore if a contractor a commercial arrangement is terminated because of one partyrsquos insolvency that contract orcommercial arrangement will cease being performed



The creditors who obtain unsecured right before the declaration of bankruptcy shall file their claims tothe bankruptcy trustee


The court will set the period for the filing of claims when it declares a companyrsquos bankruptcy Theperiod shall be no less than fifteen (15) days and no more than thirty (30) days from the date of

354

bankruptcy declaration


(1) First priority

The expenses and debts of bankruptcy estates enjoy the first priority to be distributed

The expenses of bankruptcy estates include

(i) the expense arising from managing liquidating and distributing the bankruptcy estates

(ii) the necessary litigation expense for all creditorsrsquo common benefit

(iii) the remuneration for the bankruptcy trustee

The debts of bankruptcy estates include debts which are

(i) arising from the bankruptcy trusteersquos act which related with the bankruptcy estates

(ii) arising from the performance of bilateral contracts entered into by the company in insolvency

(iii) arising from voluntary service for the bankruptcy estates and

(iv) arising from unjust enrichment of the bankruptcy estates

(2) Claims in bankruptcy inferior to the first priority

The claims with preference right on any property of the bankruptcy estates shall be distributed prior toother claims

(3) The claims below shall not be filed as claims in bankruptcy

(i) the interests arising after the declaration of bankruptcy

(ii) the expenses for joining the bankruptcy proceedings

(iii) the damage or penalty arising from any non-performance because of the declaration ofbankruptcy and

(iv) any penalties fines or imposition payment from the government



The bankruptcy trustee shall file a distribution report to the court after the distribution is completed The court shall make a ruling for concluding the process after it receives the said report However ifany estate is found after the distribution plan is declared but within three (3) years upon the courtrsquosruling for concluding the process the bankruptcy trustee shall proceed with a supplemental distributionupon the courtrsquos approval

355

If the bankruptcy estates are not enough to pay off the expenses and the total debts the bankruptcy trusteeshall file a motion to terminate the process In this situation the process will also be concluded by thecourtrsquos ruling to grant the motion



If the company is a company limited by shares and it is likely to be rebuilt or rehabilitated a creditor orcreditors of such company who have claims equivalent to 10 or more of the capital from the totalnumber of issued shares may apply to the court for reorganization of that company in order to avoidbankruptcy and dissolution



According to the Bankruptcy Law of the ROC (Taiwan) foreign bankruptcy proceedings have no effectover the bankrupt companyrsquos property in Taiwan

356

United Kingdom

Louise Verrill Partner Brown Rudnick LLP

wwwbrownrudnickcom email lverrillbrownrudnickcom tel 44 207 851 6072



Typically the creditor will take security by way of a charge over the debtorrsquos assets However otheroptions may include security by way of

Pledge where the creditor will take possession of assets until the debt is repaid

Lien where the creditor gains the right to assets or

Mortgage


If within specified periods before the insolvency a company enters into certain types of transactionsthe liquidator or administrator may be able to challenge them for example as

(i) Wrongful or fraudulent trading

(ii) Transactions at an Undervalue

(iii) Transactions Defrauding Creditors or

(iv) Preferences

Any floating charges may also be invalid if created within two years of the commencement of thewinding up or appointment of an administrator


Directors have a duty to act in the interests of creditors when a company is facing insolvency or isinsolvent Directors could face liabilities for example for wrongful or fraudulent trading ormisfeasance if the liquidators see fit to apply to the court with such a claim Misconduct could result indisqualification from office for up to fifteen years

2 Taking action


The Court must be satisfied that the company is or is likely to become unable to pay its debts as theyfall due (the lsquocash flowrsquo test) or that the value of the companyrsquos assets are or are likely to become less

357

than the amount of its liabilities (the lsquobalance sheetrsquo test)



Administration

Appointed administrators conduct the business and affairs of the company (often by continuing to tradethe business) with a view to realising as much money as possible for the creditors of the company Anadministration has a ldquocascade of objectivesrdquo The first objective is the rescue of the company as a goingconcern To the extent that this is not realisable or if this would be less beneficial to the creditors as awhole then the second objective takes effect which is to achieve a better result for the creditors as awhole than would be likely if the company were wound up without first being in administration Finallyif this second objective is not achievable the third objective of the administration is to realise thecompanys property for the benefit of one or more secured or preferential creditors

The Special Administration Regime (lsquoSARrsquo)

SAR is aimed at providing a better framework for the administrators of collapsed investment banks andinstitutions

Liquidation (often known as lsquowinding uprsquo) of which there exist two types

(i) Compulsory - a court based procedure and

(ii) Voluntary ndash which may be members initiated (lsquoMVLrsquo) if the company is solvent or creditor initiated(lsquoCVLrsquo) if the company is insolvent

Company Voluntary Arrangement (lsquoCVArsquo)

A CVA allows a company to address its financial difficulties through compromise or other arrangementbetween the company and its creditors (see Part I of the Insolvency Act 1986) A CVA is implementedunder the supervision of an insolvency practitioner known as the lsquonomineersquo before implementation of theCVA and as the lsquosupervisorrsquo afterwards


A scheme of arrangement is a statutory procedure under Part 26 of the Companies Act 2006 whichallows a company to make a compromise or arrangement with its members or creditors (or any class ofthem) Each class of creditor votes separately


Administration

(i) Out of court appointment by companydirectors

The companydirectors must demonstrate that the cash flow test is met and the proposed administratormust declare in a statement filed with the Court that he believes that the purpose of administration isreasonably likely to be achieved

(ii) Out of court appointment by Qualifying Floating Charge (lsquoQFCrsquo) holder

358

The holder of a QFC who wishes to appoint an administrator may do so if the terms of his securityinstrument allow it The QFC holder must give notice of intention to appoint to any prior ranking QFCand file it at Court

Court appointment

An application to the Court for the appointment of an administrator may be made by either the companyits directors or one or more creditors of the company or a combination of them

An interim moratorium commences upon the application being made The full moratorium takes effectwhen the order is made However where an administrative receiver is already in place the moratoriumdoes not take effect until his appointor consents to the application

Liquidation

Compulsory a creditor director administrator liquidator (if applicable) may apply for a court order

Voluntary the shareholders by special resolution

CVA

The shareholders and creditors approve the CVA following a proposal from the directors oradministratorliquidator (if applicable) The authorised nominee reports to the Court as to whether theproposal should be put to the shareholders and creditors A simple majority of shareholder approval isrequired and creditors representing at least three-quarters of debt owed


The company administratorliquidator (if applicable) any creditor or shareholder can petition the Courtto order a meeting of creditors or shareholders to agree an arrangement


No

3 Creditor issues

Administration

An administrator may pay dividends to secured and preferential creditors He can only pay dividends tounsecured creditors with the permission of the Court

The effect of the moratorium is to grant the company breathing space by giving it protection from itscreditors

Under a moratorium

(i) no step may be taken to enforce security over the companys property except with the consent of theadministrator or permission of the Court

(ii) no step may be taken to repossess goods in the companys possession under a hire purchase

359

agreement this includes a conditional sale agreement chattel leasing agreement and a retention of titleagreement except with the consent of the administrator or permission of the Court

(iii) a landlord may not exercise a right of forfeiture by peaceable re-entry except with the consent ofthe administrator or permission of the Court

(iv) no legal process (which includes execution and distress) may be commenced or continued againstthe company or its property except with the consent of the administrator or permission of the Court

The exception to the moratorium is where the Financial Collateral Regulations apply ndash the holder oflsquofinancial collateralrsquo is not bound by the moratorium and remains entitled to enforce its security Thisapplies to situations where the collateral taker has possession of the collateral and the collateral is inthe nature of a financial instrument or cash

Liquidation

Secured creditors have the right to enforce their security for the full amount of the debt If the value ofthe debt exceeds that of the security the creditor will rank as unsecured for the balance Unsecuredcreditors have no rights of enforcement

CVA

A CVA binds all unsecured creditors of a company but does not affect the rights of secured orpreferential creditors unless they agree to the proposals A moratorium is now available to smallcompanies (as defined by the Companies Act 2006)


Until the scheme is approved creditors may take any enforcement action available to them


Administration

Set-off only applies following notice from the administrator of an intention to make a distribution tocreditors

Liquidation

If prior to the liquidation there have been mutual credits debts or other mutual dealings between thecompany and its creditors proving a debt in the liquidation mandatory set-off will apply



Administration

A UK administrator takes over running the company from its directors and acts as agent of the company

The administrator may sell all or part of the companyrsquos assets This is the case even in respect of assets

360

that are subject to a floating charge The holder of the floating charge will have the same priority inrespect of the proceeds of sale as it had over the disposed of property

The administrator also has power subject to obtaining a court order to dispose of property that issubject to a fixed security interest or of property in the companyrsquos possession that is the subject of hirepurchase or retention of title arrangements or leases The disposal proceeds must be paid to the securityholder or owner of the property

Liquidation

The liquidator gains control after appointment and the powers of the directors cease

CVA

Once approved the nominee becomes the lsquosupervisorrsquo whose level of control will depend upon theterms of the particular arrangement


The directors of the company retain control


Financing will vary according to each procedure In administration administration expenses will rankabove the claims of floating charge holders and behind the claims of fixed charge holders Theadministrator may also borrow and cause the debtor to grant security for any borrowing undertakenSuch security will not however have automatic priority and the administrator has limited ability toobtain Court approval to override existing negative pledges

There is no equivalent market for DIP lending in the UK


Administration

The appointment of a UK administrator may entitle a contract counterparty to terminate its contract withthe debtor depending on the terms of the contract This can result in suppliers and customers taking theopportunity to renegotiate their contracts with the administrator However the administrator cannotreject unprofitable or burdensome contracts

Administration has the potential to erode the value of a business A landlord may not terminate a leaseby peaceable re-entry if the tenant goes into administration

The moratorium does not prevent a counter-party from exercising its right to terminate a contract withthe company if the contract contains such a right (though it prevents legal process being commenced)

Liquidation

The liquidator may terminate any onerous contracts to allow the company to avoid future liabilities Hewill also wind down the business

CVA Scheme of Arrangement

This will be dependent upon the specific terms of the arrangement

361



Administration

In administration the following rules of priority apply

(i) The administratorrsquos costs of realising fixed assets

(ii) fixed charge holders

(iii) obligations incurred under new contracts

(iv) general expenses and costs of administration

(v) preferential creditors

(vi) floating shareholders

(vii) unsecured creditors (only with approval from the Court)

(viii) shareholders

Liquidation

Creditors seeking to claim must prove their debt by submitting a formal claim (lsquoproof of debtrsquo) to theliquidator Claims will rank similarly to Administration Priority above


Creditor ranking will be dependent upon the specific terms of the arrangement scheme (see cram-downbelow)



Administration does not result in a cram down of the companyrsquos debt However the administrator mayassist in facilitating a scheme of arrangement or CVA (see below)

Cram down is available for both schemes of arrangement (under Part 26 of Companies Act 2006 requiremajority in number of creditors three quarters in value of claims) and for CVAs Proposals for theseusually need to be approved by more than half in value of the shareholders and more than three quartersin value of the creditors


Administration

362

The usual exit from administration for a company with insufficient assets to meet its liabilities is a CVAor Scheme of Arrangement (either of which can lead to a cram down (including of secured debt in thelatter case)) or liquidation Where the objective is to keep the company running as a going concern andthis is achieved the administrator will resign and the directors will re-assume control Note also thatthere are a number of rules ndash such as time bars and Court procedures which may conclude anadministration

Liquidation

The company is dissolved 3 months after the final creditors meeting

CVA

Upon successful completion of the terms of the CVA a company reverts to its original status whereby thedirectors and shareholders regain control Should the CVA fail another procedure may be commenced


Following implementation of the scheme the company reverts to its original status



Negotiating a non-statutory restructuring may be possible Potential limiting factors include

(i) viability of the underlying business

(ii) terms of the companyrsquos finance documents and

(iii) indemnity of the lenders

Debt equity swaps are increasingly sought from US holders of UK bonds


Pre-packaged sales a company enters administration and its assets are immediately sold




(i) The EC Regulation insolvency proceedings opened in a member state must be recognised in allother member states

(ii) Cross Border Insolvency Regulations 2006 dictates that foreign proceedings must be recognised inany country

363

(iii) Insolvency Act 1986 s426 demands co-operation between specified jurisdictions

(iv) Letters of Request

(v) Common law Case law is developing and a universalist approach to insolvencies is beingchampioned by some leading insolvency lawyers and practitioners

364

Uruguay

Agustina Loinaz ALS Global Law amp Accounting

wwwalsuruguaycom email aloinazalsuruguaycom tel (+598) 2900 9730



1 Mortgages Mortgages need to be registered at the Public Registration Office to maintain thepreference right over other mortgages that could be held over the same property

2 Pledges Over goods that can be taken into custody by the creditor or kept in the debtorlsquos custody

3 Liens

4 Guarantees it can be established that if the debtor doesnrsquot pay under the terms of a contract a thirdparty ldquothe guarantorrdquo will pay in the debtorrsquos name

5 Embargo this can only be done by Judge The creditor should make the request to the judgeimmediately after it is found that there has been a first delay of a payment The embargo could bespecific over an asset or generally over all debtorsrsquo present and future assets

The embargo needs to be registered and guarantees that in case the debtor doesnrsquot pay the creditor canexecute over that asset However mortgagees and pledges have preference over an embargo


Transactions and any other contract entered into by the company can be attacked to restore the assets ofthe company before the declaration of insolvency To achieve this goal the Judiciary Act Statemen andCorporate Reorganization No 18 387 2008 provides special action called an Action of Revocation

Object of the action

This action aims to provide for the reintegration of the active mass assets or rights that had left thedebtors assets before the insolvency

The transactions that can be the object of this action are ones which presumably have been made withintent to defraud creditors or at least have the potential to deplete warranties

The reintegration process is only necessary when the obligations and debts of the company exceed theassets which guarantee the payment to the creditors If the assets of the company which could be subjectto closing sale or execution are sufficient there is no need to revoke the transaction even thosepresumed unlawful

There are acts or transactions that are considered intrinsic or inherent in the business of the debtorwhich cannot be revoke The exception is justified by the need to respect the acts and contracts whichthe company canrsquot function without

365

The objective of the revocation action is to restore things to the state they were immediately prior to theconclusion of the transaction or contract now revoked

What liabilities might director arise from the company trading while in distress

When managers or directors acting within the law diligently within the limits of the corporate purposeand in accordance with the bylaws there is no personal responsibility for the performance of acts ofmanagement and representation The consequences of their actions fall within the given company

Director responsibility will be born when in the management of corporate business and in companyrepresentation directors violate legal provisions or rules or commit offences of care The inertia of thedirectors in the exercise of their duties and negligence in observing their commitments are also a sourceof liability

2 Taking action


According to the Law ldquoJudicial Declaration and Corporate Reorganization Competitionrdquo the insolvencyof the debtor can be solved with a 1) payment agreement (which can be broad and flexible in content) orcan be derived from the 2) liquidation of assets (bankruptcy) Both stages have in common the aim tosatisfy creditors of the debtor They differ as to the means used to do so

Payment Agreement

A payment agreement is a preclusive nature pact concluded between the debtor and a majority ofcreditors which is binding on all creditors (logically the signatories but also dissidents and the absent)Once in the liquidation phase it is impossible to convene a payment agreement

The objective of the payment agreement is to agree a formula for payment of the obligations of thedebtor The law does not deal with such the substance of the agreement but greatly expands the list ofpayment formulas and leaves a door open for the debtor to create any legal solution

Besides the traditional amend and extend provisions it allows the transference of property theestablishment of a company to unsecured creditors the capitalization of liabilities the creation of atrust the reorganization of the company the administration of the property or any other contentwherever permissible Finally the Law allows that the agreement provides for the delivery of thedebtors assets to a cooperative of workers incorporated for some or all staff

Bankruptcy

This process implies the executionauctionsale of the companyrsquosrsquo assets to pay the creditors It can alsoimply the arrest of the debtor in case of fraud and the judicial occupation order of all property of thebankrupt and his books papers and documents The arrest of telegraphic correspondence of the debtorthe prohibition of payments or deliveries of the debtor


The state of insolvency of the debtor is presumed in the following cases

1 When there are more debts than assets determined in accordance with appropriate accounting

366

standards

2 When there are two or more liens or execution claims against the debtor for an amount greater thanhalf the value of the companyrsquos assets capable of execution

3 When there are one or more obligations of the debtor which have expired more than three monthsago

4 When the debtor had failed to pay its tax obligations for over a year

5 When there is permanent closure of the location of the establishment where the debtor conductsbusiness

6 When the Central Bank of Uruguay had ordered the suspension of one or more bank accounts of thedebtor or the closing of the debtors accounts in the banking system

7 When in the case of private agreement of reorganization the debtor fails to appear in court

However the presumption made by these cases about that the Company is insolvent can be proof wrong

The state of insolvency of the debtor is confirm in the following cases

1 When the debtor requests it

2 When the debtor has been declared bankrupt or any other form of bankruptcy by a judge of thecountry where that debtor is domiciled

3 When the debtor had made fraudulent acts to obtain credit

4 When there is an absence of the debtor or administrators to meet their obligations


Payment Agreement

The presentation of one or more proposed agreements is a debtors right it is not primarily restricted bythe insolvencyHowever the debtor does not enjoy absolute freedom the debtor must submit hisproposal in a given time and meet certain formal requirements

Special report on the continuation of the settlement

A trustee or auditor is named to report on the feasibility of the continuation or liquidation plan Thereport must refer exclusively to its viability that is the possibility of the future of the plan based onlegal and accounting documents In other words the trustee or the auditor should predict the success orfailure of the proposed solution

Opposition

Even if an agreement has obtained the necessary majority creditors who have been unlawfully deprivedof the right to vote or who voted against the proposed agreement or against the trustee or the auditormay challenge the agreement before a judge

Bankruptcy

367

The triggers of insolvency described above must be provendemonstrated to a Judge


1 The debtor

2 Any creditor

3 Any of the administrators or liquidators of a legal person even if they lack powers of representationand members of the internal control body

4 The partners personally liable for the debts of the civil and commercial companies

5 The co-debtors guarantors or guarantors of the debtor

6 Stock exchanges and trade associations with legal employers

7 In the case of inheritance any heir legatee or executor

The debtor will be required to apply for its own insolvency within thirty days of having becomeinsolvent or of knowing of his state of insolvency

The process is call ldquovoluntaryrdquo when requested by the debtorand will be call ldquonecessaryrdquo in the othercases

What is the extent of court Involvement

Payment Agreement

Powers of judge

The law establishes that the court must make an order approving the agreement if there are noobjections However this wording also contrasts clearly with the following article - which provides forthe case where objections have been deducted - which provides that the court shall render judgmentapproving the agreement or not

In the absence of opposition the law only gives one day for a judge to approve the agreement

Bankruptcy

The court will decide on

1 The suspension or limitation of the debtor free will to manage its assets

2 The appointment of a trustee or administrator of the business

3 Whether to ask for a meeting of Creditors to be held within a maximum period of one hundred eightydays

4 The registration of the judgment on the National Register of Personal Acts Section Bans andpublication of an excerpt of it in the Official Journal

The decision of the judge may be appealed by the debtor or by anyone with a legitimate interest withinsix days of the last publication

368


Payment Agreement

Requirements for submission of proposals

Opportunity

The law states that the proposal is to be presented at least sixty days before the creditors meeting

If the debtor does not file a proposed agreement at the time appointed on the board the judge is requiredto order the execution of the company assets

Formal requirements

The agreement must be submitted in compliance with certain requirements of form

1 It must be submitted in writing to the judge The text should clearly explain the payment proposal andconditions

2 The proposal must be signed by the debtor

Bankruptcy

The Court shall register the resolution within twenty-four hours

The publication of the extract of the judgment will be sorted and processed directly by the Court withintwenty four hours of issuance The Official Journal will then be published immediately


Bankruptcy

Continuation of the activity of the debtor The judicial declaration of insolvency does not imply thecessation or closure of the activity of the debtor unless the court decides otherwise at any time duringthe contest at the request of the debtor creditors the trustee or receiver

Payment Agreement

1 Continuation of the activity of the debtor

2 The creditors canrsquot claim their credits owe by the company during the time of the agreement

Are there any political factors which may eat into play

No

3 Creditor issues

All creditors whatever their nationality or domicile will be included in the list of creditors subject toclaim the debt

369

Equal treatment shall be given to all creditors within the same class subject to certain exceptionsexpressly provided by law

Effects on Creditors

How might secured creditor to enforce its security

Preferential loans

1 Mortgages

The property is the object to be executed to pay this creditor The execution goes to pay the mortgageinterest and costs and expenses If there is a remnant it will go first to other secured creditors and then tounsecured creditors In case there is more than one mortgagee the preference will go to the oldestmortgagee that was registered

2 Pledges

Pledges apply the same rules for mortgagees but the property can be movable The property is theobject to be executed to pay this creditor The execution goes to pay the pledge interest and costs andexpenses If there is a remnant it will go first to other secured creditors and then to unsecured creditorsIn case there is more than one pledge the preference will go to the oldest pledge recognized by theCommercial Law

3 Labor Creditors

The labor creditor whose claim has been recognized by past judgment on res judicata has a preferenceover the rest of common creditors If there is more than one the payment will be a pro rata

How are unsecured Creditors affected

Common creditors Unsecured creditors have no preferences or privileges (art 1750 C Com) Thesecreditors will be paid at the end of the process from the remnant of the execution of the assets Thepayment to this creditors is made a pro rata (each creditor will get the same percentage of their credit)meaning that it doesnrsquot matter if the debtis older in comparison to other creditors debt both will be payin the same percentage



During the process the Company the creditors or the judge can appoint some creditors or an auditor tocontrol the company with different levels of power to intervene in the Company

1 The shareholders can appoint an auditor who does not displace the governing body of the company(coexist) The auditor functions are examination of the business and advice

2 Precautionary agreements (judicial and extrajudicial) of the judicial liquidation

For precautionary agreements of corporations the law provides two types of interventions One of themis to put in two intervening creditors who will be observers of the debtors business and its purpose to

370

ensure the preservation of the debtor during the pendency of the process

The other involves the appointment of a creditor to audit the performance of the debtor while servingunder the reorganization

Provisional Intervention

The judge can appoint in the same act two informant creditors auditors Creditors should be chosenfrom the twelve largest non-privileged or controlling affiliates or members of an economic group

These creditors are appointed in order to intervene and report on the course of business Their functionincludes the examination of books and records of the debtorrsquos company The company will also renderaccounts to the designated administrator The designated creditors must report on the progress of thebusiness the accuracy of the documents attached to the management and on the basis of the bankruptcypetition

Definitive intervention

At the meeting of creditors it is appointed two auditors These auditors have the task of intervening inthe management of the company The corporation cannot sell its property receive or pay any amount ormake acts of administration without the permission or assistance of the auditors

Designation of the auditor

The designation may occur in different instances

a Appointment by judge

b Appointment by special majority of creditors

Functions

a intervenes in the course of business of the debtor

b makes a report on the state of business the reasons given in the specification and business conduct ofthe debtor and

c attends the meeting of creditors



No


Bankruptcy

The administrator will continue managing the company until all assets of the debtor are executed and theresult is distributed between creditors depending on their creditor class

371

Payment Agreement

Debtorrsquos company will continue with its business and will pay its creditors in the terms of the agreementuntil the last creditor is paid



Negotiations with creditors are possible but it is recommended that this is done by the legal process ofpayment agreement


No



- Tratado de Montevideo de 1940 to apply by the MERCOSUR Applies the jurisdiction of the countrywhere the commercial establishment is located In case there are establishments in different countries itwill apply for each establishment in the jurisdiction of the country is located so there will be manyprocesses It doesnrsquot matter the nationality of the debtor

- Convencioacuten Interamericana sobre Conflicto de Leyes en Materia de Sociedades Mercantiles de 1979

What is the approach of the companys jurisdiction in Respect of recognition of foreign proceedings

Art 192 to 195 of the Uruguayan company law which establishes that the foreign companies will beregulated by the place of incorporation unless that regulation goes against Uruguayan Order Public

372

USA

Daniel J Saval Partner Brown Rudnick LLP

wwwbrownrudnickcom email dsavalbrownrudnickcom tel +1 212-209-4905



Lien where the creditor takes security interest and gains the right to assets or

Mortgage a security interest in specific real estate property

Processes and requirements for perfection of security interests vary state-by-state


If within specified periods before the debtorrsquos insolvency it enters into certain types of transactionsthose transactions may be subject to attack by the trustee debtor-in-possession or its creditors as either

(i) Preferential transfers

(ii) Intentionally fraudulent conveyances

(iii) Constructively fraudulent conveyances debtor received less than reasonably equivalent value andeither (i) insolvent when transfer made or became insolvent thereby(ii) engaged in business for whichremaining property was unreasonably small or (iii) debtor intended to incur or believed it would incurdebts beyond its ability to repay

(iv) Fraudulent conveyances under state law (usually provides longer look-back period fortransactions)


In contrast to many other jurisdictions the United States does not recognize trading-while-insolventliability as an independent claim against directors Liability may attach on another grounds such asfraud or misrepresentation When a company is in what courts describe as ldquothe zone of insolvencyrdquodirectorsrsquo traditional duties of loyalty and good faith to the company and its shareholders are extended toits creditors as well Breach of either duty to a creditor may give rise to liability on a derivative basis

2 Taking action


The Bankruptcy Code does not require formal insolvency as a precondition to filing for relief The twochief tests for insolvency that courts use in evaluating a debtorrsquos financial condition are

373

(i) Cash-flow insolvency when a debtor is unable to meet its obligations as they come due and

(ii) Balance sheet insolvency when a debtorrsquos liabilities exceed its assets



Reorganization (Chapter 11) The debtor in most cases remains in possession of its assets and continuesto operate its business as the ldquodebtor-in-possessionrdquo Certain corporate actionsmdashincluding thoseoutside the debtorrsquos ordinary course of businessmdashrequire court approval During the initial phase of thereorganization the debtor-in-possession has the exclusive right to propose a plan of reorganization andsolicit the votes of creditors in favour of that plan Following this initial exclusivity period otherparties in interest including the debtorrsquos creditors and equity holders may propose rival reorganizationplans In addition any party in interest may for cause shown seek to have a reorganization converted toa liquidation (Chapter 7 case)

Liquidation (Chapter 7) In the typical case under Chapter 7 a debtorrsquos officers and directors areremoved a third-party trustee is appointed to wind down the debtorrsquos operations and to collect and sellits assets and disbursements are then made to the debtorrsquos creditors

Receivership In addition to relief under federal bankruptcy law state law may provide for creditors tohave a receiver appointed to replace a debtorrsquos management wind down its business and pay its debts


A debtor may file a voluntary petition for relief either to reorganize or liquidate State corporation lawand a companyrsquos charter and bylaws will define who is empowered to file a petition Approval of adebtorrsquos board of directors is generally required

An involuntary petition for relief may be filed by a debtorrsquos unsecured creditors Federal bankruptcylaw requires the support of three holders of non-contingent undisputed unsecured claims against thedebtor State receivership law varies but generally requires similar creditor support

3 Creditor issues

A key feature of US insolvency law is the automatic stay From the time of the debtorrsquos filing for reliefany and all collection activities by the debtorrsquos creditors must cease with violation punishable by courtsanction The automatic stay applies not only to traditional collection activitiesmdashfor exampleforeclosing on collateralmdashbut to any activity that could threaten the property of the debtorrsquos estateincluding the commencement or continuation of any lawsuit against the debtor and the creation of anylien or other security interest in the debtorrsquos property The automatic stay also requires the turnover ofany property of the debtor that is in the possession of a third party What is more courts will undercertain circumstances extend the automatic stay to the debtorrsquos officers and directors as well as itsparents subsidiaries and affiliates barring any collection activity against those individuals and entities


The Bankruptcy Code under certain circumstances preserves a creditorrsquos right to set off an outstandingobligation it owes to the debtor with one that the debtor owes to it The chief requirement for a set off isthe notion of mutuality generally understood to mean that the debtorrsquos and creditorrsquos obligations are

374

directly related to each other rather than being owed to a related or third party Set offs that do not meetthis requirement however violate the automatic stay



Reorganization Under Chapter 11 the debtor normally retains control of its own operations as debtor-in-possession Creditors and other parties in interest may request that the court appoint a trustee toreplace the debtorrsquos management for cause shown or where such appointment is in the best interests ofcreditors and the estate but such relief is rarely granted

Liquidation Under Chapter 7 a trustee is appointed to manage the debtorrsquos affairs wind down itsbusiness liquidate its assets and make distributions to its creditors

Receivership In a receivership the debtorrsquos management is replaced by a court-appointed receiverwho has the same role and duties as a trustee under federal bankruptcy law


ldquoDebtor-in-possession financingrdquo (ldquoDIP financingrdquo) is generally available to fund the debtorrsquos continuedoperations while it is reorganizing Such financing is only available upon court approval DIP financingis often provided by a debtorrsquos prepetition creditors and is typically granted higher priority in thedebtorrsquos capital structure than its prepetition debts Liens securing DIP financing can prime the liens ofprepetition lenders provided the prepetition lenders receive adequate protection for any diminution invalue In addition financing to aid the debtor in exiting its reorganization (ldquoexit financingrdquo) is generallyavailable subject to the approval of its creditors as part of the general plan confirmation processdiscussed below Because DIP and exit financing is procured in the private market the terms a courtmdashand creditorsmdashwill accept often depends on prevailing market conditions


In general a debtorrsquos contracts are unaffected by its filing for relief under the Bankruptcy Code USlaw explicitly provides that so-called ldquoipso factordquo clausesmdashcontractual provisions that purport toterminate the contract upon a partyrsquos filing for reliefmdashare ineffective once a debtor is in in-courtreorganization (however there are certain exceptions including in relation to contracts to extend creditor financial accommodations) The debtor retains the ability during the course of its reorganization todecide whether to assume or reject its outstanding commercial contracts and leases Those contracts thatare assumed become property of the debtorrsquos estate and may be assigned by the debtor either to itselfpost-reorganization or to a third party

Importantly the law is unsettled on a debtorrsquos ability to assume and assign intellectual propertyagreements running in its favour Courts are split as to whether patent copyright and trademarkslicenses are freely assignable with many requiring the consent of the licensor



375

The following priority rules (with certain exceptions generally inapplicable to corporations) apply inboth reorganizations and liquidations

(i) Secured claims (including if allowed related fees interest and costs)

(ii) Administrative expense claims

a Superpriority DIP financing claims

b Adequate protection claims

c All other administrative expenses

(iii) Wage and salary claims from the period immediately preceding the debtorrsquos filing

(iv) Employee benefit plan claims

(v) Government tax claims

(vi) Unsecured claims and

(vii) Equity-holdersrsquo claims



Cram-down procedures exist only in reorganizations The specific procedures are codified in theBankruptcy Code The Bankruptcy Code requires that at least one class of impaired creditors vote toaccept the reorganization plan and the remaining classes of impaired creditors can be crammed down


In a reorganization a case is concluded after a debtorrsquos plan of reorganization is confirmed by thebankruptcy court following voting on the plan and the courtrsquos adjudication of any objections to the planA reorganized debtor emerges with a discharge of its prepetition obligations A liquidation is concludedwhen the trustee has collected all of the debtorrsquos assets liquidated them through sales or litigationrecoveries and distributed the proceeds pro rata to the debtorrsquos creditors Following the liquidationthe debtorrsquos prepetition obligations are discharged and the debtor ceases to exist





(ii) obtaining requisite creditor consent (in the case of public bonds note that outside of a formal

376

insolvency proceeding US law does not allow a change in payment terms to be binding on a dissentingholder)

(iii) terms of the companyrsquos finance documents and

(iv) indemnity of the lenders


Prepackaged filings when a debtor enters reorganization after the requisite votes in favour of thereorganization plan have already been solicited and obtained



In 2005 the Bankruptcy Code was amended to include Chapter 15 which governs ancillary and othercross-border insolvency cases In doing so the United States adopted the Model Law on Cross-BorderInsolvency (the ldquoModel Lawrdquo) promulgated in 1997 by the UN Commission on International TradeLaw (ldquoUNCITRALrdquo)

The stated purpose of Chapter 15 is to provide effective mechanisms for dealing with insolvency casesinvolving debtors assets claimants and other parties of interest in more than one country TheBankruptcy Code provides that this general purpose is realized through five specific objectives

(i) to promote cooperation between the United States courts and parties of interest and the courts andother competent authorities of foreign countries involved in cross-border insolvency cases

(ii) to establish greater legal certainty for trade and investment

(iii) to provide for the fair and efficient administration of cross-border insolvencies that protects theinterests of all creditors and other interested entities including the debtor

(iv) to afford protection and maximization of the value of the debtors assets and

(v) to facilitate the rescue of financially troubled businesses thereby protecting investment andpreserving employment

In keeping with the Model Law Chapter 15 provides for the recognition of a foreign proceeding only ifit is pending in the country where the debtor has the center of its main interests (a ldquoforeign mainproceedingrdquo) or in a country where the debtor has an establishment ie a place of non-transitoryeconomic activity (a ldquoforeign nonmain proceedingrdquo)

377

Vietnam

Dang The Duc Steve Jacob and Tran Quang Indochine Counsel

wwwindochinecounselcom ducdangindochinecounselcom tel +848 3823 9640



Once bankruptcy proceedings have been filed with the court the company can no longer enter into anysecured transactions using the companyrsquos assets If however the creditor enters into the transactionprior to the initiation of bankruptcy proceedings she can secure the assets of the company through thestandard procedures provided for secured transactions Such procedures include entering into a contractwith the debtor (there are specific requirements for a secured transaction contract) and registering thesecurity with the appropriate authority There are several types of security but primarily the authoritiesrecognize mortgages (over immovable property and large ticket assets) pledges (over both tangible andintangible property) and other security interests (including deposits security payments collateral andguaranties)


In general the answer is no An exception exists however for certain transactions which are enteredinto by the company within a period of three (3) months prior to a courtrsquos acceptance of jurisdictionover an insolvency claim The following transactions are subject to this exception

a) donation of moveable or immoveable property to another personb) settlement of a bilateral contract in which the obligation of the business is clearly greater than that ofthe other partyc) payment of an undue debtd) mortgage or pledge of assets in respect of debts ande) other transactions for the purpose of disposing of assets of the business

In addition performance of contracts which are currently effective may be suspended if requested by aninterested party


Regular directors are not liable for reporting insolvency If a director has been appointed to be the legalrepresentative of the company however he must file a petition of insolvency to the court within three(3) months of becoming aware that the company is insolvent Such legal representative is subject to amonetary fine ranging from VND1000000 to VND3000000 in addition to a compulsory filing of thepetition of insolvencyAll directors and managers of the company are prohibited from establishing an enterprise or holding amanagerial position for up to three (3) years from the date on which their company is declared bankrupt

378

2 Taking action


After the decision to initiate bankruptcy procedures is issued a judge may decide to either (i) beginprocedures for recovery of business operations ldquoRecovery Proceduresrdquo) or (ii) apply for procedures toliquidate the companyrsquos properties and to write off its debts (ldquoLiquidation Proceduresrdquo) If in theprocess of conducting Recovery Procedures the court deems it advisable the court may abandonRecovery Procedures in favor of Liquidation ProceduresPrior to taking a decision the company is subject to a General Meeting of Creditors (ldquoGMCrdquo) TheGMC is a meeting during which the creditors of the company meet to discuss the advisable method forrecovering their interests in the company If the GMC decides that the assets and the performance of thecompany so justify they can either develop on their own or cause the company to develop a plan torestructure the business of the company in such a way as to allow for the eventual recovery of debtsThese Recovery Procedures are initiated when the judge accepts the creditorsrsquo decision at the first GMCto restructure the business of the debtor Once the court accepts a rescue plan creditors must superviseimplementation of the rescue plan to ensure that the company abides by the plan through the final phasesof recovery Concurrently the company must send the court a report on the status of implementation ofthe plan for recovery of business operations once every six monthsIf the GMC does not feel that Recovery Procedures are justified or if the court otherwise deemsLiquidation Procedures will be instituted Liquidation Procedures entail the liquidation and sale ofassets of the company and the equitable distribution of the proceeds of such sale to any creditors of thecompany


There are no informal procedures for the companygt


Neither the Recovery Procedures nor the Liquidation Procedures are particularly creditor-friendlyWhile creditors may have more control in the case of Recovery Procedures they are still the ones whomust bear the burden of reduced or delayed debt payments and the potential for the company to enterLiquidation Procedures at any time Liquidation Procedures on the other hand do not favor securedcreditors as the priority of payment of debts places employee and tax obligations ahead of the right ofsecured creditors And even then in the case of multiple secured creditors the payment may be reducedto a pro rata basis if the liquidation does not yield sufficient funds to pay all of the secured creditors infull


Insolvency is triggered when (i) an unsecured or partially secured debt is payable (ii) requests havebeen made for payment of the debt and (iii) the debtor has failed to repay the debts


The process for filing a petition to commence bankruptcy proceedings is fairly straightforward Thepetition must contain the

a) full date on which the petition is madeb) name and address of the enterprise in questionc) grounds for the request to commence bankruptcy procedures

379

In addition the petition must be submitted together with the following documents

a) Report on the business operations status of the enterprise with an explanation of the reasons for andbackground to insolvency if the enterprise is a shareholding company required by law to be audited itsfinancial statements must be certified by an independent auditing organizationb) Report on unsuccessful measures taken by the enterprise to remedy its inability to pay its due debtsc) Detailed list of the assets of the enterprise and the location of visible assetsd) List of creditors of the enterprisee) List of debtors of the enterprisef) A list specifying any joint debtors or guarantors of the enterprise andg) Other data which the court requires the enterprise to provide in accordance with law

Once the petition is filed with the proper court the obligations of the filing party are generallyconcluded However it is important to note that the filing party remains responsible for the veracity ofhis petition and may be liable if the court finds that the petition was filed for dishonest or maliciousreasons


A bankruptcy petition may be filed by the following persons

a) An owner or legal representative of a companyb) An unsecured or partially secured creditorc) An employee representative if the company fails to pay wages or other debts owing to its employeesandd) A shareholder or group of shareholders


Extensive The court is involved from the initial petition through the final declaration of bankruptcyOnce an allowed person has submitted a petition or notice of insolvency the court administers the entireprocedure From the first GMC to the appointment and guidance of the liquidation committee (appointedby the court to manage and liquidate the assets of the company during the Liquidation Procedures) to thedistribution of proceeds to creditors the court is the primary instrument of executing a bankruptcy


If the GMC and the court opt to pursue Recovery Procedures the company is allowed up to three (3)years to return to solvency There are no specific deadlines provided for conducting LiquidationProcedures In practice the full bankruptcy process can be quite lengthy


Upon the decision of the court to accept insolvency proceedings notice must be served to the creditorsand debtors of the company as well as published in a local newspaper for three consecutive editionsThe law is unclear as to whether responsibility for accomplishing this notice falls upon the court orupon the insolvent company


In addition to continuing to operate the business of the company under the supervision of the court thecompany has the right to participate in the formulation of a rescue plan in the case of application ofRecovery Procedures In the case of Liquidation Procedures the shareholders of the company have a

380

priority of right after unsecured creditors


Yes Vietnam allows for debtor in possession procedures in two instances First while the insolvencyprocess is being conducted and prior to the decision to pursue Liquidation Procedures the company maycontinue to operate as before and remain in control of all of its assets More substantially a debtor inpossession scenario is contemplated by the Recovery Procedures in which the company remains inpossession of its assets to the extent allowed by a rescue plan and continues to operate in an attempt toreturn to solvency


One point to be aware of is the emphasis on asset protection Any contracts entered into for three monthsprior to the acceptance of jurisdiction by the court may be invalidated if deemed to do harm to the stateof the assets of the company This is a major allowance that creates a situation where good faithtransactions can be terminated thus creating additional unsecured creditors of the company


In a developing country such as Vietnam it is always important to be aware of the potential for politicalfactors to affect a legal proceeding While bankruptcy is a rather benign procedure it is still possiblethat inter-ministerial politics or local politics may interfere particularly with the tax department andother departments that must close their books on the companyrsquos existence In addition the nature andpolitical position of the company itself may bring to bear higher level involvement

3 Creditor issues


Unsecured creditors take second to last in the list of priorities of right after bankruptcy fees employeewages and social insurance requirements In most instances it is unlikely that an unsecured creditor willsee much of her debt repaid by a bankruptcy proceeding


Where the judge issues a decision to commence Liquidation Procedures debts which were secured byassets mortgaged or pledged prior to the court accepting jurisdiction over a petition to commencebankruptcy proceedings shall be entitled to priority payments only insofar as such debt can be satisfiedby the sale of the attached assets if the value of the mortgaged or pledged property is insufficient to paythe amount of the debt the outstanding part of the debt becomes unsecured and is payable during theliquidation process of the assets of the enterprise if the value of the mortgaged or pledged property isgreater than the amount of the debt the difference shall be included in the value of the remaining assetsof the company


If the two parties have ldquoreciprocal obligationsrdquo for the same type of asset the debtor may set off anyclaims relating to transactions that were established prior to the decision to initiate bankruptcy Objectshaving monetary value may be used to offset the obligation to pay money Once the bankruptcyproceedings begin however all set-offs are prohibited

381


The law does not currently contemplate inter-company debt issues


Only towards subsidiary companies as they are treated as simple assets of the companyand liable to beauctioned off as part of the Liquidation Procedures


The first GMC will be convened within thirty (30) days after the court receives the list of creditors Atthe first creditorsrsquo meeting a report is delivered to the meeting by the head of the Liquidation Committeeregarding the performance and financial position of the company the results of the inventory andvaluation of assets the list of creditors and debtors and other relevant informationFollowing discussion the creditors may pass a resolution approving measures to restructure thebusiness operations and for the repayment of debts A resolution regarding a rescue plan requires atleast 50 percent or more of the unsecured creditors present at the meeting representing at least two thirdsof the total of the unsecured debts (ldquoRequisite Majorityrdquo) The first GMC can also recommend that thecourt appoints someone to manage the company in place of the person currently in charge of itsmanagementAfter adopting a rescue plan the court will order the plan be put to a meeting of creditors for approvalIf a resolution is passed by the Requisite Majority at a properly convened meeting of creditors the planwill be implemented by the courtrsquos order



Immediately upon receipt of a decision to proceed with bankruptcy the company is put under courtsupervision If the GMC deems it necessary to preserve the assets of the company they may request thatthe court appoint an interim manager to handle the day-to-day business of the company until such time asbankruptcy proceedings are concluded In the case of Recovery Procedures once the court issues adecision accepting the proposed rescue plan of the company the company will continue to operate underits own management Every six (6) months during the implementation of the rescue plan the companymust submit a report to the court outlining its progress in accomplishing the plan In addition the GMCmay continue to monitor and supervise the implementation of the rescue plan Any changes to the rescueplan must be approved by the Requisite Majority and the court


The law provides for fundraising as an element of the rescue plan but provides no specifics as to themethod which the company should use to secure such financing


It is possible though dependent upon the agreement of the GMC


There are few protections for employees in the bankruptcy process While a representative from thetrade union is to be included on the committee for the management and liquidation of assets there is no

382

other provision for employee representation in the bankruptcy process In the case of LiquidationProcedures the employees of the company have a priority right of payment second only to securedcreditors and the bankruptcy fees themselves In the case of Recovery Procedures the employees aregranted the protections offered by the Labor Law In both cases severance and dismissal benefits aredictated by the Labor Law


As discussed above any transactions that were entered into during the three months immediatelypreceding the courtrsquos acceptance of jurisdiction of a bankruptcy petition may be invalidated uponrequest In addition contracts that are otherwise in the process of performance may be suspended if themanagement and liquidation committee deem such suspension would be in the best interests ofpreserving the assets of the company In such instance the other party to a suspended contract wouldbecome an unsecured creditor of the company and paid with the same priority as any unsecured creditor



Creditors must file claims with the court Claims submitted to the court must request payment of debtsclearly itemize the debts state the amount of debt outstanding and specify the amount of debt that issecured or unsecured Additional evidence of the debt should be submitted at the same time Failure totimely file a claim acts as a waiver


Within sixty days from the last date of the notice published in newspapers of the decision of the court tocommence bankruptcy procedures


Secured assets are first applied to the creditor who holds the security Any remaining amount from thesale of such assets is pooled with the remaining assets of the company and distributed as follows

a) Bankruptcy feesb) Unpaid wages severance allowances and social insurance in accordance with the provisions of lawand other rights pursuant to the signed collective labor agreement and labor contractsc) Unsecured debts payable to creditors named in the list of creditors on the principle that if the valueof the assets is sufficient to pay all debts of all creditors each creditor shall be paid the full amount ofhis or her debt and if the value of the assets is insufficient to pay all debts each creditor shall only bepaid the corresponding proportion of his or her debt andd) Shareholders of the company


No The procedure is relatively straightforward though in practice the administrative nature of theprocess might create additional red tape that is not contemplated in the written law

383



No The GMC makes a decision by Requisite Majority being two-thirds of all unsecured creditorsThere is no discrimination by class


The judge issues a decision of bankruptcy at the same time as the issuance of the suspension of theliquidation procedures of the companyrsquos assets


Secured creditors are well protected by the secured transaction and bankruptcy laws Any mortgage orpledge of assets entered into prior to the courtrsquos acceptance of the bankruptcy petition will be honoredby application of the secured assets towards payment of any remaining debt Any amount outstandingafter such application will be counted as unsecured debt and treated as such This means that at the veryleast the secured creditor will obtain the value of the secured assets The outlook for the securedcreditor is therefore quite good In the case of Recovery Procedures there is no clear cut procedure fordealing with secured assets though it would seem that they are applied to payment of secured paymentsprior to the full implementation of the rescue planUnsecured creditors on the other hand have a much harder row to hoe While they participate equally inthe GMC their recompense comes well down the list and when it does come it is likely to be paid at apro rata basis meaning the unsecured creditor will only get pennies on each dollar owed Thoughunsecured creditors also have the opportunity to be very involved in the establishment andimplementation of the rescue plan should they decide to pursue Recovery Procedures That involvementalone would suggest that Recovery Procedures are preferred over the much more final LiquidationProcedures



It is possible to negotiate a non-statutory restructuring for example the creditors may become membersof the company and join in daily business activities to restore the companyrsquos operations Renewal ofdebts and debt equity swaps are also popular for the creditor to seek the prospective payment


No



Vietnam has not signed any treaties relating to insolvency that will affect a company It has beenrecommended however that Vietnam should apply the UNCITRAL Model Law of Cross-BorderInsolvency

384


The law in this area is poorly developed It is unclear whether recognition of foreign insolvencyproceedings will be considered as the provision of judicial aid or as the recognition of a foreign courtorder If the company is a subsidiary of a multi-national or foreign company bankruptcy of the parentcompany or owner may be submitted as a reason to close the business in Vietnam

385

Foreword


Australia

Austria

Belgium

Brazil

Canada including Quebec specific variations

China

Costa Rica

Denmark

Estonia

Finland

France

Germany

Greece

India

Indonesia

Ireland

Israel

Italy

Korea

Latvia

Lithuania

Malaysia

Mauritius

Mexico

The Netherlands

New Zealand

Romania

Russia

Serbia

Singapore

South Africa

Spain

Switzerland

Tunisia

Taiwan

United Kingdom

Uruguay

USA

Vietnam

DISCLAIMER

The Members of the Law Firm Network are separate independent law firms and there is no legalrelationship between the law firms or with the Network itself

No member firm is responsible for the professional services performed by any other member firm

The Network itself is not a partnership and does not provide any professional services either in itsown name or otherwise

The contributions in this Insolvencey and Re-structuring guide are not advice merelyguidelines and any formal advice if required should be sought specifically and directly from therelevant law firm

3


International

Insolvency and

Restructuring GuideNovember 2014

4

Foreword

The LFN Insolvency and Restructuring Group has collated this guide from contributions made byMembers of the Law Firm Network This guide is designed as a resource for all Members and theirclients This guide showcases the expertise that the Law Firm Network is able to call on throughout theworld and includes contributions representative of almost every legal system

Together we have provided a practical introduction to the real issues for distressed companies and theircreditors addressing commercial realities In the guide we have focussed on the following

1 The issues arising for a company when it is in financial difficulty

2 The available processes and necessary considerations for companies thinking of taking action torestructure or seek insolvency protection

3 The issues for secured and unsecured creditors of companies in financial difficulty

4 Financing options available and the necessary considerations for companies that wish to continuetrading during a restructuring or insolvency process

5 Alternative restructuring processes that can be undertaken without the need for court procedures

6 The need for international interaction and the cross border issues affecting distressed companies andtheir creditors

We thank all of the Contributors to this guide and hope it becomes your first point of reference Shouldyou need further advice or expertise then you should contact the relevant individual contributors

It has been a pleasure liaising with all contributors to create this guide which is a testament to the spiritco-operation and mutual benefit of the Law Firm Network

Anthony M D Kirwan

Executive Director


tkirwannetoverseascom

wwwnetworkedlawcom

5


1 Australia

2 Austria

3 Belgium

4 Brazil

5 Canada

6 China

7 Costa Rica

8 Denmark

9 Estonia

10 Finland

11 France

12 Germany

13 Greece

14 India

15 Indonesia

16 Ireland

17 Israel

18 Italy

19 Korea

20 Latvia

21 Lithuania

22 Malaysia

23 Mauritius

24 Mexico

25 The Netherlands

26 New Zealand

6

27 Romania

28 Russia

29 Serbia

30 Singapore

31 South Africa

32 Spain

33 Switzerland

34 Taiwan

35 Tunisia

36 United Kingdom

37 Uruguay

38 USA

39 Vietnam

7

Australia

Philip Colman Partner Mason Sier Turnbullwwwmstcomau email philipcolmanmstcomau tel 61 3 8540 0240

In Australia there are many types of ldquoexternal administrationrdquo of companies These include voluntaryadministration (where an ldquoAdministratorrdquo is appointed) liquidation (where a ldquoLiquidatorrdquo is appointedand receivership (where a ldquoReceiver and Managerrdquo is appointed)



Taking security over personal property

The Personal Property Securities Act (PPSA) has established a new national system that regulatessecurity over personal property The PPSA is based on similar systems in Canada and New Zealand

The PPSA determines the priority between competing security interests and the enforceability ofinterests in the case of an insolvency event A security interest over personal property can only beenforced in the case of the insolvency of the borrower if the security interest was registered on thePersonal Property Securities Register an online tool used to create maintain and release registrations

Taking security over real property

Security can be taken over land by way of mortgage These interests must be registered with theregulatory body of the appropriate Australian state Although registration is not mandatory a registeredinterest will usually take priority over an unregistered interest


There are several means available to liquidators to attack certain types of transactions that are enteredinto by a company these are often referred to as the clawback provisions of the Corporations Act 2001(Cth) (Corporations Act)

Voidable Transactions

Where a company is insolvent and has entered into a commercial transaction that transaction may befound to be a voidable transaction in particular circumstances

A transaction is voidable if it is an insolvent transaction an unreasonable director related transaction ora transaction to defeat creditors (see below)

The transaction must have been entered into or an act was done for the purposes of giving effect to thetransaction during the two years ending on the relation back date (the date that the application forwinding up was filed or the date upon which a voluntary administrator was appointed or a liquidatorwas voluntarily appointed)

8

Two types of Insolvent Transactions

(i) Preferential transactions

A transaction of a company is an insolvent transaction if it is anunfair preference given by the company to a particular creditor in preference over other creditors withthe same or better rights The transaction must occur in the 6 months prior to the relation back dateUsually the transaction will involve a payment of a debt owed by the company to a creditor

(ii) Uncommercial transactions

A transaction of a company may be found to be an uncommercial transaction where a reasonable personin the companyrsquos circumstances would not have entered into the transaction having regard to the benefitsto the company of entering into the transaction the detriment to the company of entering into thetransaction and the respective benefit to other parties of the company entering into that transaction Anyother relevant matter may be taken into account

Unreasonable director related transactions

Liquidators may seek recovery of these transactions An unreasonable director related transactionincludes where the director or a close associate of the company is involved in a transaction with thecompany for little or no benefit to the company The question to be determined is whether it wasunreasonable for the company to enter into that transaction

Transactions to defeat creditors

Where a company is involved in an insolvent transaction and the company became a party to thattransaction for the purpose of defeating delaying or interfering with the rights of any or all of thecreditors on winding up of the company that transaction will be voidable

The transaction must be either entered into or an act must be done to give effect to the transaction within10 years of the relation back date in order for the transaction to be made vulnerable in this context


In Australia there are both common law and statutory directorrsquos duties

When a company is in distress one of the main duties that will come into play is the duty not incur adebt while insolvent Where directors are found to have allowed the company to incur a debt ininsolvency they will become personally liable to pay the debt if the company goes into externaladministration and their personal assets may become vulnerable on the enforcement of any Court order

2 Taking action


As stated above there are several types of formal external administration procedures under theAustralian system

Receivership

9

This is the process by which a receiver and manager is appointed (usually by a secured creditor) toadminister a companyrsquos property that is the subject of the security granted to the secured creditor Theappointment of a receiver and manager is primarily governed by document granting the security withsome guidance from the Corporations Act

This process is usually used by a secured creditor to realise their secured property

Voluntary Administration

This process is designed to assist insolvent companies to satisfy their creditors and come to a formalarrangement with creditors to keep the company operating or enter liquidation

There are two stages in this process

(i) Voluntary Administration Stage

The voluntary administration stage is where an administrator is appointed (usually by resolution of thedirectors of the company) and within a short period of time the company assesses whether it can put acompromise proposal for creditors to vote on During this time an administrator is appointed to controlthe companyrsquos affairs The administrator will also convene two meetings of creditors where thecreditors will determine which is the best course of action to realise their interests

(ii) Creditors Resolution Stage

During this stage the creditors will elect one of three options for the company

a To enter the company into a Deed of Company Arrangement (DoCA)

This is a formal agreement between the company and its creditors (and third parties where applicable)to satisfy the company debts The arrangement is set out in terms and conditions and binds all securedand unsecured creditors to the extent the terms and conditions allow A DoCA is always preceded byvoluntary administration or

b To end the voluntary administration and return to normal trading or

c To wind up the company

Liquidation

This is the winding up of the companyrsquos financial affairs and bringing the corporate structure of thatcompany to an end A liquidator will undertake the liquidation process and distribute the companyrsquosassets to creditors A company can be placed into liquidation in three ways

(i) Memberrsquos voluntary winding up

(ii) Creditorrsquos voluntary winding up

(iii) Court order generally proceedings will be brought to the court by a creditor that has issued astatutory demand (discussed below)


The company is always able to deal directly with creditors and enter into payment arrangements so long

10

as it is not in external administration

It is very rare for this informal approach to be adopted as the same result can be achieved by the use ofvoluntary administration and a DoCA which binds all creditors


All options have benefits for both creditors and debtors The specific situation of the company will needto be considered in order to determine the most appropriate and beneficial option


The test for insolvency in Australia is based on the cash flow of the company

Under the Corporations Act a company is insolvent where the company is unable to pay all its debts asand when they become due and payable

When the court considers if a company is insolvent several factors will also be taken into accountincluding continuing losses overdue taxes poor relationship with present bankers including inability toborrow additional functions no access to alternative finance and creditors unpaid outside of tradingterms

What is the process for filing (Commencing winding up of a company)

As to the three types of external administration referred to above the processes for instigating themvary

(i) Receivership A secured creditor will issue a demand and execute an instrument of appointment of areceiver and manager

(ii) Memberrsquos voluntary winding up This is commenced by a resolution of shareholdersmembers thatthe company be wound up

The directors must declare that the company is solvent prior to the shareholdermembers being able tovote on the resolution to wind up the company

Note a resolution for winding up must be a special resolution this means that at least 75 of those whovote must be in favour of the resolution

(iii) Creditorrsquos voluntary winding up This is commenced by a resolution of shareholdersmembers thatthe company be wound up After this resolution is passed there is a meeting of the creditors where thecreditors may elect to appoint an alternative liquidator

(iv) Court ordered winding up Where a company has not complied with a valid statutory demand orother grounds for winding up exist an originating process may be filed in a State Supreme Court or aFederal Court followed by a Court hearing to determine whether the company should be wound up

Who can place the company into liquidation

Members Voluntary Winding up

The companyrsquos members may pass a special resolution in favour of winding up after there has been adeclaration of companyrsquos solvency by the directors

11

Except with the leave of the court a company may not wind itself up if there is already an applicationbefore the court to wind up the company the court has order that the company be wound up ininsolvency

Creditors Voluntary Winding Up

As described above for members voluntary winding up

Compulsory Winding Up

A person with standing may apply to the courts for a compulsory winding up Persons with standing mayinclude the Australian Securities and Investments Commission (ASIC) a director and a creditor of thecompany

If a voluntary winding up has started the court can still order a compulsory winding up


Usually the courts involvement will not extend beyond applications for winding up (as describedabove) Sometimes however liquidators will utilise the Courts to

bull Examine directors and other persons associated with the company

bull Recover preferential payments and seek orders in relation to uncommercial transactions and the likeand

bull Recover debts owed by the companys debtors


The length of the process depends on the company and the complexity of the winding up


Notices generally

The Corporations Act and the Corporations Regulations 2001 prescribe the necessary notices to belodged with ASIC in connection with liquidation voluntary administration and receivership

Statutory demand

To start the process of a creditor seeking to wind up a company a creditor may serve a statutory demandon a company under the Corporations Act This must be formally served upon the company

The demand can be made in relation to a single or multiple debts that the company owes to the personthat are due and payable and total an amount greater than $2000

The debt amount must be specified in the demand and give the debtor at least 21 days from when thedemand is served to meet the debt

Where debt is not a judgment debt the debt must be accompanied by an affidavit verifying the amount ofthe debt and that the demand complies with the statutory rules

The effect of a failure to comply with the statutory demand is that the company is deemed to be unable to

12

pay its debts as and when they fall due and payable and therefore insolvent thereby giving the creditorgrounds to make an application to the Court to wind up the company


This varies depending on the type of external administration

The debtor company benefits from a stay of executions and suspension of enforcement processes when itis wound up in insolvency


No


The PPSA affects priorities in security interests This is a new area of law in Australia and the way inwhich it will interact with insolvencies is unclear and yet to be tested in the courts This is somethingcreditors should be aware of in Australia


No

3 Creditor issues


The effect on unsecured creditors depends on the type of external administration

If the company goes into external administration an unsecured creditor must wait for a dividend to bepaid in the order of priorities set out below It is rare for unsecured creditors to receive any significantdividend from a company in external administration


It may do so by appointing a receiver and manager (as set out above)

If a company is in voluntary administration a secured creditor will have 13 business days within whichthey may enforce their security If they do not exercise their security in this time they will be subject tothe moratorium that exists while a company is in voluntary administration


Set off will apply where there is lsquomutualityrsquo of debts owed to and from the insolvent company Acompany that is both a debtor and creditor of the insolvent company will be entitled to set off thoseclaims against each other

Set off will not apply where one of the clawback provisions have been triggered

Set off will not apply where there is a lack of mutuality this includes with related companies

Creditors will not be able to rely on set off where at the time the company entered into the agreement

13

the creditor had knowledge that the company was insolvent




Holding companies may be liable for the insolvent trading of their subsidiaries

A holding company will contravene the act where it was the holding company of the subsidiary at thetime the debt was incurred the debt was incurred whilst the subsidiary was insolvent there werereasonable grounds to suspect that the subsidiary was insolvent or the incurring of that debt would causethe subsidiary to become insolvent the holding company or any of its directors were aware ofreasonable grounds to suspect that the subsidiary was insolvent having regard to the nature and extent ofthe corporations control over the subsidiaries affaires it was reasonable to suspect the holding companyor any of its directors ought to have been aware of the grounds for suspicion


In case of liquidation and voluntary administrations a committee of creditors may be established by aresolution of the creditors



The relevant external administrator (the receiver and manager liquidator or administrator)

How is the company financed (whilst in external administration)

The company is financed through its current assets


No DIP funding does not exist in Australia


The claims of employees over their debts for wages and contributions are given priority under theCorporations Act for payment before certain other creditors are eligible to be paid

Where an employee has lost their job due to the redundancy or bankruptcy of their employer they maybe able to gain protection for their unpaid entitlements through the General Employees Entitlements ampRedundancy Scheme (GEERS) The employee must submit an application to claim this protection


Most contracts or other commercial agreements contain provisions giving the other party the right toterminate the contact if the company goes into external administration

In addition liquidators have the right to disclaim onerous contracts

14

If neither of the above occurs the contract will theoretically continue


In order to receive a dividend from liquidation the creditor will need to submit to the liquidatorsufficient information to prove the debt

A proof of debt form will be sent to the creditor and will need to be completed and delivered to theliquidator

If the creditor is a company the proof of debt form must be signed by someone authorized by thecompany to sign that form


Creditors must be allowed by the liquidator at least 14 daysrsquo notice before the deadline to prove thedebt This notice must be given to each person claiming to be a creditor whose debt or claim has notalready been admitted by the liquidator The notice must also be published in the daily newspapers inthe states where the company carried out business


Secured creditors are able to ask the liquidator to deal with the secured assets on their behalf andaccount to them the proceeds and costs of collecting and selling those assets

Alternatively a secured creditor may appoint a receiver to take control and deal with some or all of thesecured assets

Thereafter claims generally rank as follows

(i) Costs and expenses of the liquidation including liquidators fees

(ii) Outstanding employee wages and superannuation

(iii) Outstanding employee leave of absence (including annual leave long service leave and sick leavewhere appropriate)

(iv) Employee retrenchment pay and

(v) Unsecured creditors

Each category is paid in full before the next category is paid If there are insufficient funds to pay acategory in full the available funds are paid on a pro rata basis and the remaining categories get nothing


No



15

No



The ending of the liquidation process may be brought about by deregistration of the company This hasthe effect of causing the company to no longer exist and as a consequence of this fact it can no longer besued

Alternatively an application can be brought before the court to have the liquidation brought to an end


Unsecured creditors are very low in the order of classes that are paid out This often means that thereare not enough funds from the liquidation to satisfy the debts owed to those creditors



There is a system of arrangements and restructures provided for in the Corporations Act Howeverhaving regard to the ease of voluntary administrations this alternative system is rarely used


No



Australia has ratified the Model Law on Cross-Border Insolvency through the Cross-Border InsolvencyAct 2008


Australia applies the Model Law on Cross-Border Insolvency in relation to the recognition of foreignproceedings

16

Austria

Andreas Alzinger Partner Steven Roberts Attorney at Law Baier Rechtsanwaumllte OG

wwwbaierpartnerscom email alzingerbaierpartnerscom robertsbaierpartnerscom tel +43 1515 500



A creditor may take security by mortgaging or pledging the debtorrsquos assets by pledging the debtorrsquosreceivables or by agreement on reservation of title concerning the goods delivered to debtor

Transactions which were entered into when the debtor was already in financial difficulties mayhowever be challenged for certain reasons and within certain timeframes (see below)


Courts may upon application of the administrator and other creditors set aside certain transactions of aninsolvent debtor which have been entered into before the opening of the insolvency proceedings

(i) Within 2 years prior to insolvency Legal acts of the debtor which are

- to the disadvantage of its creditors if such acts are made with the intention of adversely affecting thecreditors and the other party is aware of that intention or

- made gratuitously unless made to fulfil a legal obligation

(ii) Within 1 year prior to insolvency Legal acts made in this timeframe by which a creditor receives asecurity or payment and which are made after the debtor is unable to pay its debts when due after itbecomes over-indebted or within 60 days before the opening of the insolvency

- if by this legal act a creditor receives a securitypayment in a way or at a time to which he was notentitled (unless this does not constitute a favourable treatment compared with all other creditors) or

- if by this legal act a creditor receives a securitypayment from the debtor who intended to treat thiscreditor favourably over other creditors and such creditor was or ought to have been aware of thedebtors intention

(iii) Within 6 months prior to insolvency If a debtor is unable to pay its debts when due is over-indebted or a petition for opening insolvency proceedings has been filed of which the creditor is orought to be aware of and

(iv) by a legal act such creditor receives securitya payment or

(v) a legal act is to the disadvantage of all other creditors

17


The general rule is that the directors of a company are required to file an application for insolvencywithin 60 days of the company formally becoming insolvent (triggers) In the event that the directors didnot file for insolvency without undue delay they risk being held liable to creditors A director mightfurthermore be liable to the company if transactions were performed after the company has becomeinsolvent or if trading was made in absence of proper consideration A director might as well be liableif he undertakes payments to shareholders while in distress thus causing insolvency

Further details

(i) Liability for tax and other duty payments

The Federal Duties Act (Bundesabgabenordnung ndash BAO) stipulates that the directors are obliged to takedue care that the relevant tax provisions are complied with and that especially any and all taxes andduties are timely paid In case of negligent violation the directors shall be jointly and severally liablefor such taxes and duties provided they can not successfully be claimed from the company

The liability starts with the appointment of the director and ends with the revocation or resignation ofthe director Upon appointment the director is required to investigate whether the company has compliedwith the relevant provisions of the law Should the director conclude that tax declarations or statementsmade by the company where incorrect or incomplete or not made at all the director is required to notifythe authorities of the circumstances within 3 months otherwise the director shall be liable for thedamage

The director shall not be liable for taxes and duties that become due following his revocation orresignation

The relevant provisions for liability are sect 9 sect 15 sect 80 BAO further sect 119 sect 120 sect 124 and sect 210BAO

The mandating of auditorstax advisers for the representation of the company vis-agrave-vis the fiscalauthorities does not exclude the liability of the directors as these are required to supervise control andauthorize the activities of the auditorstax advisers

(ii) Liability for contributions to the social insurance

The same liability as above (22) applies to the contributions toward the social insurance (portionwhich is deducted from the wages of the employees as well as the portion to be paid by the company) onthe basis of sect 67 ASVG Directors shall be liable only under the principals as described above(negligent conduct contributions cannot be recovered from the company)

(iii) Liability under the Austrian Business Reorganization Act (Unternehmensreorganisationsgesetz ndashURG)

The URG assumes that there is a requirement for reorganization if the

a equity ratio of the company is less than 8 (capital and reserves) and

b there is over 15 years debt redemption time

If the directors and or auditors fail to apply for a reorganization procedure (a formal procedure with acourt appointed reorganizer) and the company eventually goes bankrupt the directors shall be

18

personally liable to the company for debts that are not covered by the bankruptrsquos estate (as the assets ofthe company form the bankrupts estate which is used to satisfy the creditors this liability is in practiceto the benefit of the creditors) The liability is however limited with EUR 100000- per director

In practice auditors will warn the management about these crucial figures and will either advise to applyfor a reorganization procedure or state why to their opinion this is not necessary

2 Taking action


The new Insolvency Act (which replaced both the former Bankruptcy Act and the Composition Act)provides the following

(i) bankruptcy proceedings (Konkursverfahren) and

(ii) restructuring proceedings (Sanierungsverfahren) - with or without self-management of the estate bythe debtor

Restructuring proceedings (Sanierungsverfahren) with self-management (ldquomit Eigenverwaltungrdquo)require a restructuring plan providing for payment of at least 30 per cent of the debts within two yearsand need to be accepted by the majority of the creditors present at the court hearing

Restructuring proceedings (Sanierungsverfahren) without self-management (ldquoohne Eigenverwaltungrdquo)require a payment of at least 20 per cent of the debts The debtor may also offer a restructuring withinongoing bankruptcy proceedings however the debtor is not allowed to manage the assets which is thesole authority of the (insolvency-) administrator (ldquoInsolvenzverwalterrdquo)

Although it is not an insolvency procedure as such so called ldquoreorganisation proceedingsrdquo(ldquoReorganisationsverfahrenrdquo) continue to (theoretically) exist on the grounds of the Reorganisation ActTheir intention is to avoid insolvency proceedings Reorganisation proceedings are not mandatory andhave hardly any effects except in relation to personal liability of the directors of a company if it laterbecomes insolvent Reorganisation proceedings do not have much relevance as they are hardly everpractised


Informal procedures do not exist A debtor can of course make arrangements with its creditors to sort itsdebts However no private arrangement may ever prevent any creditor from filing for insolvency orfrom enforcing binding rulings against the debtor


In principal insolvency proceedings are creditor-friendly because the purpose of such proceedings isthe collective satisfaction of the debtors creditors However there are possibilities for self-management and establishment of a restructuring plan (see above) which gives the debtor moreinfluence than in ldquotraditionalrdquo insolvency proceedings


Statutory requirements are that

19

(i) the debtor is incapable of meeting its financial obligations (cash flow test) or

(II) the debtor is over-indebted (balance sheet test)


Insolvency proceedings are initiated either by written application (to court) of one or more creditors orof the management of the insolvent company

The management is obliged to file for insolvency without undue delay if the statutory requirements aremet (see above) in any case not later than 60 days after the company becomes insolvent This 60 daymaximum period may be used by the management to take steps to reorganise the business of the debtor inorder to avoid insolvency If the management does not comply with these time limits it may becomeliable for damages resulting from the delay



A creditors request is admissible if the creditor has a legal interest in the commencement of theinsolvency proceedings which is given if the claim is evidenced and the reason explained whyinsolvency proceedings should be commenced


Upon opening of insolvency proceedings the court will appoint an (insolvency) administrator(Insolvenzverwalter) who is in charge of the entire process with the debtor losing all rights to deal withits property

Only if the debtor when filing for insolvency applies for ldquorestructuring proceedingsrdquo(ldquoSanierungsverfahrenrdquo) and produces a restructuring plan offering 30 per cent payment within twoyears may the management of the estate remain with the debtor - ldquoself-managementrdquo (however undersupervision of an insolvency administrator appointed by court)


There is no given time frame It is not unlikely for insolvency proceedings of companies to take up to 3to 4 years or even longer depending on the size of the insolvent company the numbers of creditors andthe possibilities to find an investor for the insolvent company However a business will be carried onduring a reorganisation procedure for 1 to maximum 2 years until the reorganisation plan has beenaccepted





20

Upon the commencement of the insolvency proceedings the debtors right to manage and transfer theinsolvency estate will be vested in the insolvency administrator However the debtor in principle hasthe right that the business should be continued (unless there are substantial reasons for closing thebusiness) at least until the first report hearing which usually takes place about 2 months aftercommencement of insolvency proceedings During insolvency creditors principally may not execute intothe insolvency estate or into the debtors other property


In principle insolvency proceedings aim at satisfying the creditors as best as possible However thenew Insolvency Law does offer the possibility of self-management and a restructuring plan This mightresemble the debtor in possession process to some extent but even in this case the debtor is supervisedby an insolvency administrator appointed by the court However during a restructuring process theinsolvency administrator is not permitted to dispose of assets


No

3 Creditor issues




Austrian insolvency law distinguishes between the following classes of creditors

(i) creditors with separation rights (Aussonderungsglaumlubiger) such as the owners of assets in thepossession of the debtor their assets are to be separated from the insolvency estate and transferred tothe owner

(ii) secured creditors (Absonderungsglaumlubiger) such as holders of pledges creditors with the benefitof mortgages over land buildings construction rights independent buildings or plant and machinerycreditors with a security assignment and creditors with a security interest over moveables Assetssubject to a security interest will be separated from the insolvency estate and will be realised separately(by the administrator) Each secured creditor may claim its right to such separation (subject to a 90 dayperiod)

(iii) preferential creditors (Masseglaumlubiger) such as the administrator and all creditors whose claimsaccrue after the opening of the insolvency proceedings

(iv) unsecured creditors (Insolvenzglaumlubiger) comprising those with claims against the debtor whichaccrued before or at the time of the opening of insolvency proceedings

(v) subordinated creditors (nachrangige Glaumlubiger) having claims which are subordinated by agreementor operation of law (eg certain loans of shareholders granted to the insolvent debtor before opening ofinsolvency proceedings) and

21

(vi) certain excluded creditors (ausgeschlossene Glaumlubiger) for example creditors having acquiredclaims on interest since the opening of the insolvency proceedings




Principally inter-company debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholder loans are subordinated In addition any repayments of shareholderloans within up to two years before filing for insolvency can be challenged by the insolvencyadministrator and therefore have to be paid back by the shareholders It is important to know that theseprovisions do not only apply to ldquorealrdquo shareholder loans but also to any claims of shareholders whichcould be qualified as loans from an economic perspective For example deferred claims for paymentresulting from supply of products could also be qualified as loan with the abovementionedconsequences


Missing any contractual agreements creditors cannot take recourse in respect of any companiesaffiliated with the debtor However creditors can take recourse from any personally liable shareholderof the debtor


All creditors are members of the creditors convention (Glaumlubigerversammlung) Generally the rights ofthe creditors convention are limited to being heard by and to submit petitions to the insolvency courtThe most relevant rights it exercises are to decide as to whether to accept restructuring proceedings(Sanierungsverfahren) without self- management (ohne Eigenverwaltung) during insolvency proceedingsand to propose members of the creditors committee (Glaumlubigerausschuss) It may also agree or object toa purchase of assets by members of the creditors committee

The insolvency court may appoint 3 to 7 persons who form the creditors committee which represents allcreditors if deemed necessary by the court or in case of an expected sale or lease of the debtorsbusiness The members may be creditors or not individuals or legal entities The committee has the rightto be heard on various issues and generally monitors and assists the administrator Of most relevanceare the committees rights to approve the sale of the debtors business and to release assets from theinsolvency estate (which both also require approval of the insolvency court)



In regular insolvency proceedings the company is controlled by the insolvency administrator

In self-management proceedings the company is controlled (managed) by the debtor however under thesupervision of the insolvency administrator

22


In regular insolvency proceedings the company is financed by the insolvency estate and by receivablescollected by the insolvency administrator The insolvency administrator might in addition continuetransactions to earn money for the company or approach individual creditors for granting preferredloans

In self-management proceedings andor if the regular business is carried on this may in additioncontribute to the financing


There is principally no possibility to arrange DIP funding However receivables deriving fromtransactions entered into by the insolvency administrator or the self-managing debtor rank among otherdebts and have to be fully satisfied As a new creditor could expect full satisfaction of his receivableshe could be ready to fund the insolvent company Nevertheless this procedure is not similar to DIPfunding


The employment contracts remain in effect Termination is possible under the usual conditions as well asunder certain special termination conditions (eg merely statutory notice periods applicable and not anyindividually agreed longer notice periods) As far as the time period after commencement of theinsolvency proceedings is concerned the employeesrsquo wages have to be paid out of the insolvency estateWages that are not paid due to insolvency are in principle (upon application) reimbursed by a specialagency



If the contract has not or has not completely been performed by the debtor and the other party by the datewhen the insolvency proceedings were commenced the insolvency administrator may at his discretionrequest performance or termination If the insolvency administrator requests performance the other partyis entitled to consideration without limitations



The insolvency creditors must file their claims in writing with the insolvency administrator Such filingshould include copies of the documents evidencing the claim Usually the insolvency administratorsprovide standard forms for the filing


In the order commencing the insolvency proceedings the creditors will be required to file their claimswith the insolvency administrator within a definite period of time However claims filed after expiry of

23

the filing period will not be excluded from the proceedings The creditor will only have to bear the extracosts if any arising from the late filing


Principally all claims rank equal Some claims will be satisfied ranking below the other claims ofinsolvency creditors such as interests and penalties for late payment accruing the costs incurred byindividual insolvency creditors due to their participation in the proceedings fines regulatory finescoercive fines and administrative fines claims to the debtors gratuitous performance of considerationas well as claims for repayment of shareholdersrsquo loans

Insolvency creditors will only be satisfied after satisfaction of creditors entitled to separation (seeabove) after the satisfaction of creditors holding a contractual pledge a pledge acquired by attachmentor a legal lien in an asset forming part of the insolvency estate and after the remuneration of debtscreated by activities of the insolvency administrator


No




Particularly in order to maintain the enterprise an arrangement in an insolvency plan may be achievedAfter acceptance of the insolvency plan by the creditors the plan will be confirmed by the insolvencycourt As soon as confirmation of the insolvency plan has become binding the insolvency court willdecide on termination of the insolvency proceedings




Creditors to the insolvency estate are creditors who have made transactions with the insolvencyadministrator after the commencement of the insolvency proceedings These claims have to be paid inwhole by the insolvency administrator (unless he made an official reservation due to lack of funds priorto the transaction)


24


The debtor and its shareholders can take any legal and corporate action they deem feasible in order torestructure the company However the debtor is always obliged to file for insolvency in the event of astatutory requirement (ldquotrigger for insolvencyrdquo)


Simplified procedures do exist but for private individuals only (not available for companies)



(i) The regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings

(ii) The Austrian Insolvency Act

(in addition various related provisions in other local laws)



The commencement of foreign Non-EC insolvency proceedings will be recognized unless the courts ofthe state of the commencement of proceedings do not have jurisdiction in accordance with Austrian lawor where recognition leads to the result which is manifestly incompatible with major principles ofAustrian law in particular where it is incompatible with basic rights

25

Belgium

Nicholas Damman Partner LVP LAW

wwwlvplawbe email nicholasdammanlvplawbe tel +32 (0)3 2811120



A creditor may secure his claim in various ways

(i) seizure on the debtorrsquos assets

(ii) security interest on movable property in particular floating charges

(iii) security interest on real estate (mortgage)


Certain practices performed by the debtor between the time of cessation of payment and the bankruptcywill be regarded ldquosuspiciousrdquo This time frame can be no longer than six months prior to the declarationof bankruptcy

These suspicious practices will be declared not opposable to the bankrupt estate which means that thereceiver will leave them aside in the administration and the liquidation of the bankrupt estate

Amongst others the following practices are not opposable if they were performed since the date ofcessation of payment

(i) Payments of debts which did not fall due

(ii) Payments of debts which became due other than in cash or in negotiable instruments

(iii) Mortgages and pledges created by reason of debts previously incurred

Practices performed with fraudulent prejudice of the creditors are not opposable to the bankrupt estateirrespective of the date on which they took place


There is a specific directorrsquos liability in case of bankruptcy The directorsrsquo whose manifestly grossnegligence contributed to the bankruptcy of the company may be personally and jointly liable to theextent that the creditors are not fully satisfied with the proceeds

Furthermore company managers and directors may be held jointly and severally liable of the payment ofthe social security debts to the Belgian social security authorities if the bankruptcy of the company iscaused originally by a serious fault committed by managers or directors or if the directors and managers

26

have already been in the past implicated in a bankruptcy or winding up

Directorsrsquo liability may also be engaged in case of non-compliance with the so-called alarmproceedings (failure to convoke the general assembly in case of revealed losses)

2 Taking action


Bankruptcy covers the situation of substantial and long-term problems of solvency Bankruptcyproceedings are exclusively aimed at the liquidation of the estate of an insolvent debtor and thedistribution of the proceeds amongst his creditors

Judicial reorganization the purpose of these proceedings is to provide debtors who are in principleable to live up to their legal obligations but who have a temporary liquidity problem with the means toobtain a modification of their debts either by a reduction of these debts or by temporary refuge fromtheir creditors Basically there are three options available a settlement with all creditors or two oremore a collective settlement with all creditors via a reorganization plan a transfer of the enterprise inpart or as a whole under control of the court

Voluntary winding-up a company may decide to dissolve itself The decision of such voluntary winding-up is taken at the general assembly of shareholders who will appoint one or more liquidators


An agreement between the debtor and all (or a part of) his creditors may still take place outside thecontrol of the court ie through a settlement according to which the creditors agree with a temporarysuspension of the payments by the debtor or any other measure to effect the financial recovery of theenterprise Being essentially a contractual instrument the settlement has only a binding effect on thecreditors (unsecured andor secured) which agree with it


Taking into account the above as a general rule bankruptcy might be considered a rather creditor-friendly procedure and the judicial reorganization a rather debtor-friendly procedure


The debtor is considered to be bankrupt when he has permanently ceased to pay his debts and is nolonger able to obtain credit

An indication for insolvency may also be found in case

(i) one or more seizures have been levied on the debtorrsquos assets

(ii) one or more judgments in which the debtor has been condemned to pay have been rendered ondefault against a debtor

(iii) a writ of summons at request of the social security or the tax authorities has been served upon adebtor

27

(iv) the debtor failed to publish his annual account


Bankruptcy the debtor who has permanently ceased to pay his debts and is no longer able to obtaincredit is obliged to file for bankruptcy Bankruptcy proceedings may also be initiated by one or morecreditors the public prosecutor or the provisional administrator appointed by the court

Judicial reorganization the debtor files an application to the Court

Voluntary winding-up the initiative lies with the general assembly of the company


See answer 25


Bankruptcy the key person is the receiver who is appointed by the court The liquidation of a bankruptcompanyrsquos assets and the distribution of the proceeds amongst the creditors are executed by the receiverunder the control of either a supervisor appointed by the court or the court itself

Judicial reorganization the procedure is handled under the supervision of a delegate judge who informsthe court on the evolution of the debtorrsquos situation Furthermore the composition proposal which thedebtor is deemed to make is upon approval by the creditors subject to homologation by the court

Voluntary winding-up the nomination of the liquidator by the general assembly is subject to approval bythe court


Bankruptcy there is no rule with regard to the duration in practice bankruptcy proceedings may last upto 3 years or more

Judicial reorganization the moratorium (provisional suspension of payment for debts due at the time thatthe provisional suspension was granted) may take 6 months which may last up to 12 months as from thejudgment which declares the procedure open and even 18 months in exceptional circumstances


Bankruptcy the judgment of bankruptcy must be published in the Belgian State Gazette and in one ormore (local) newspapers The receiver must advise the creditors with a view to filing their claim musttake out a mortgage on the debtorrsquos real estate and verify the debtorrsquos accounts

Judicial reorganization the judgment which declares the procedure open must be published in theBelgian State Gazette The debtor must inform his creditors upon the amount of their claim and the asseton which a security has been provided


Bankruptcy the enforcement of all court decisions against the debtor is suspended and the creditors atleast the unsecured creditors and the creditors protected by a general privilege are no longer entitled toexercise their rights of enforcement against the debtor

28

Judicial reorganization the judgment which declares the procedure open has the following effectssuspension of any means of enforcement on mobile assets and real estate suspension of any declarationof bankruptcy or judicial dissolution prohibition on seizure it being understood that any seizure whichhas been levied prior to the opening of the procedure maintains its conservatory effects


To a certain extent the judicial reorganization may be resembling to a debtor in possession process


See answer 24 second bullet point


In case of a threatening bankruptcy regarding a big company involving the unemployment of a largenumber of employees the Belgian federal government or a regional government may take measures witha view to maintaining as much jobs as possible

3 Creditor issues


Bankruptcy as a result of the fixation principle and the distribution of the assets by the receiveraccording to the ldquopari passurdquo rule the unsecured debtors are no longer entitled to exercise their rights ofenforcement against the debtor as of the time of declaration of bankruptcy

Judicial reorganization the judgment which declares the procedure open affects the (un)securedcreditors (see answer 210 second bullet point) the reorganization plan once approved by the requiredpresence-and majority quorum is binding to the unsecured creditors


The rights of enforcement of the creditors with a specific privilege on movable assets in particular thecreditor with a floating charge are suspended until the closure of the first report of verification ofclaims In practice the receiver inquires with the creditor holding a floating charge whether the latteragrees that the assets be realized by the receiver In most cases the creditor with a floating charge agreeswith this course of action

When it comes to the creditors with a mortgage if no enforcement proceedings on the real estate havecommenced prior to the bankruptcy the receiver is solely entitled to realize the real estate This generalrule does not apply to the first mortgagee who is entitled to proceed to the realization after the firstreport of the verification of claims has been filed by the receiver In practice the receiver inquires withthe mortgagee(s) whether the latter agrees that the real estate be realized by the receiver In most casesthe mortgagee(s) agree(s) with this course of action


Set-off is only applicable when the following conditions are met the mutual claims are (i) certain (ii)liquid and (iii) payable at the time of set-off

After bankruptcy set-off is in principle not possible except when (i) all legal conditions for set-off are

29

met prior to the bankruptcy or (ii) even when all legal conditions for set-off are only met afterbankruptcy insofar it concerns mutual claims which result from the same legal ground or which areconnected ie arise from the same contract

Judicial reorganization during the moratorium set-off between (i) claims in the moratorium (ie claimswhich have arisen prior to the judgment opening the procedure or which result from the petition ordecisions made in the framework of the procedure) and (ii) claims which have arisen during themoratorium is only possible when the claims are connected


Blank


An affiliate company has a separate legal personality with the result that a creditor of a companynormally has no recourse against an affiliate except when a security fi letter of comfort has beenprovided by the affiliate


Bankruptcy when the liquidation of the bankrupt estate has been terminated the creditors vote on thestatement including the total amount of the assets the receiverrsquos fees and costs the debts of the estateand the repartition of the assets amongst the creditors as made by the receiver

Judicial reorganization the creditors vote on the reorganization plan The plan is considered approvedand is binding to all creditors including those who have voted against the plan when the majority of thecreditors present at the meeting which represent 50 of all claims approves it and subsequently thecourt homologates the plan



Bankruptcy the management is not entitled to dispose of the assets nor represent the company vis-agrave-visthird parties The receiver takes over the disposal of the assets and the representation of the companyvis-agrave-vis third parties albeit under control of a judicial supervisor and the court

Judicial reorganization the management is not set aside The court will however appoint a delegatejudge who will assist the debtor in the administration of his company


It will be difficult to borrow money from a bank and the company is unlikely to attract investors unless itis able to produce a credible reorganization plan or provide extra securities


New money may be provided by virtue of a new loan agreement or as new credit pursuant to an existingloan agreement

In case of judicial reorganization such lsquonew claimsrsquo are not submitted to the lsquoconcursus creditorumrsquo and

30

are considered debts of the estate when during the period of reorganization the debtor is declaredbankrupt or put into liquidation

Alternatively a subordinated loan ie a loan in terms of which the creditor waives his right to equaltreatment treatment by priority in case of concursus creditorum may be provided


Bankruptcy

(i) Bankruptcy does not result in automatic termination of employment agreements The receiver of thebankruptcy does have the right to terminate any employment agreement

(ii) Employment agreements which have not been confirmed within 15 days are deemed to have beenterminated

(iii) Employee claims for unpaid salaries are privileged

Judicial reorganization

(i) A judicial reorganization does not result in automatic termination of employment agreements nordoes the employer have the right to suspend any employment agreements during the reorganizationprocess

(ii) In case of a judicial reorganization by collective agreement the reorganization plan may provide ina reduction of salaries Personnel representatives are being heard prior to any decision being made

(iii) In the event of a transfer of the undertaking under judicial control the acquirer is not obliged toaccept the transfer of the entire workforce Instead he may choose how many he wants to take overEmployees that are thus being transferred keep their previous employment conditions unless they wouldhave been collectively renegotiated Individual negotiations are generally not permitted


The opening of bankruptcy proceedings does not automatically lead to the termination of the contractThe receiver can either decide to fulfill a contract or disclaim (unprofitable) contracts when he is not ina position to continue to trade and he cannot ensure that the insolvent party fulfills its obligations Thetwo main exceptions to this general rule are intuitu personae contracts which are considered to end bylaw in case of bankruptcy and the avoidance clause according to which the contract is automaticallyterminated in case of bankruptcy

The opening of a judicial reorganization does not affect current contracts they continue to exist Anycontractual clause which entitles either party to terminate the contract by reason of the other party filingan application for judicial reorganization or by reason of a judicial decision opening a judicialreorganization is void



Reference is made to paragraph 31 second point

31


Bankruptcy the time frame for the creditors to file their claim is maximum 1 year after the declaration ofbankruptcy


In general terms the creditors are paid in the following order

(iv) the new creditors or creditors of the estate

(v) the creditors with a specific security (floating charge mortgage)

(vi) the unsecured creditors


No



We understand a cram-down procedure to be the imposition by a court of a reorganization plan over theobjection of some categories of creditors In case of judicial reorganization the approval of thereorganization plan by the majority of the creditors present at the meeting who represent 50 of allclaims and the homologation of the plan by the court have binding effect to all creditors includingthose who have voted against the plan


See answer 36


See answer 53



See answer 22


There is a possibility of early terminating a bankruptcy proceeding when it is clear that there are noassets or the assets are insufficient to even cover up the costs of the administration and the liquidation ofthe estate

32



The Council Regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings situated in EUMember States is of interest (hereinafter the Regulation)

This Regulation grants a special position for the creditors who have a so-called right in rem on theassets of the debtor which are located in another Member State of the EU than the state where theinsolvency proceedings were opened Those rights in rem are governed by the lex rei sitae as anexception to the general rule of the lex concursus (the law of the state where the proceedings wereopened) The opening of insolvency proceedings shall not affect the rights in rem of creditors or thirdparties in respect of tangible or intangible moveable or immoveable assets belonging to the debtorwhich are situated within the territory of another Member State at the time of the opening ofproceedings which means that these creditors are entitled to enforce their securities without anyrestriction as if there was no insolvency procedure even if the legislation of the state where the assetsare located imposes such restrictions

When it comes to insolvency proceedings which do not fall under the Regulation ie insolvencyproceedings opened in a third state the national law including possible treaties remains relevant ThePrivate International Law of that third state will determine the scope of the insolvency proceedingsopened on its territory that is to say whether or not they produce extra territorial effects

Insofar Belgian Private International Law is applicable the Belgian insolvency procedure will normallyhave universal effects and will as a result cover all the assets of the debtor wherever these assets arelocated There is however no guarantee that a third state will recognize the extra-territorial effects ofthe Belgian insolvency The assets of the debtor in these third states will only be affected to the extentthat this state recognizes the powers of the Belgian receiver


Under the EU-Regulation any judgment opening main insolvency proceedings handed down by a court ofa Member State which has jurisdiction to that effect shall be recognized and shall produce the sameeffects without need for further formality in all the other Member States as of the time that it becomeseffective in the State of the opening of proceedings

When it comes to insolvency proceedings which do not fall under the Regulation Belgian PrivateInternational Law provides for the recognition by law of foreign bankruptcy proceedings

33

Brazil

Eduardo Boccuzzi Partner Alfeu Alves Pinto Partner Boccuzzi Advogados Associados

wwwboccuzzicombr email eduardoboccuzzicombr alfeuboccuzzicombr tel 55 1130395821 55 11 30395331



Usually when creditors contract with a company they require personal securities and securities in remIf those securities turn out to be insufficient the law usually allows creditors to demand theirreinforcement Article 333 II and III of the Civil Code determines the acceleration of obligations ifpersonal and in rem securities become insufficient and debtor refuses to reinforce them or in case assetswhich serve as in rem securities suffer seizure by another creditor Acceleration is also determined incase of perishing deterioration or depreciation of in rem securities (provided that debtor refuses toreinforce them) and in case they are expropriated by government (art 1425 I IV and V Civil Code) Inaddition article 477 of the Civil Code determines that if after the conclusion of a contract one of theparties enters into financial difficulties that might render doubtful the fulfillment of contractualobligations the other party may refuse to fulfill their contractual obligations until debtor fulfills his orprovides creditor with security


In addition to our comments to the previous question the Bankruptcy Law determines that transactionsentered into by a notoriously insolvent company are to be considered fraud against creditors and shallbe annulled (art 129) Furthermore alienation and encumbrance of assets when there is a pendingexecution which can lead the company into insolvency are considered fraud against execution and shallhave no effect (art 593 Code of Civil Procedure)


Directorsrsquo liabilities which may arise from a company trading while in distress will vary according tothe type of legal entity we are talking about In case of limited liability companies and corporationsadministrators as a rule are not personally responsible for obligations undertaken in the name of thecompany However they can be responsible if proven guilty or if acting in discordance with the law orthe articles of association (art 158 Law 64041976)

2 Taking action


Formal procedures established by Law 111012005 (ldquoBankruptcy Lawrdquo) are judicial reorganizationand bankruptcy


34

Law 111012005 also provides for an extrajudicial reorganization procedure which in spite of beingextrajudicial can hardly be defined as ldquoinformalrdquo Debtor who fulfills the requirements for judicialreorganization (see our answer to question 26 below) may negotiate a reorganization plan with theircreditors off court (art 161 Law 11101) However in order to be effective the plan has to beapproved by a judge (art 165 Law 11101)


Reorganization procedures are more debtor-friendly in the sense that they have the purpose of promotingsurpass of situations of economic-financial crisis in order to stimulate the economic activity by allowingthe maintenance of production sources employeesrsquo jobs and creditorsrsquo interest and by preserving thecompany and its social purpose (art 47 Law 11101) Bankruptcy procedure on the other hand is morecreditor-friendly and aggressive for the debtor in the sense that debtor is dismissed from his activities(art 75 Law 11101) and all its obligations are accelerated (art 77 Law 11101)


According to art 94 Law 11101 insolvency is triggered by either one of the following events (i)failure by the debtor to pay without relevant reason liquid debt materialized in protested titles orexecutive titles which together surpass the amount of 40 minimum wages (aprox R$ 28960) at the timebankruptcy has been filed (ii) failure by the debtor executed for any liquid amount to pay deposit ornominate to constriction sufficient assets within legal term (iii) practice by debtor of any of thefollowing acts except if within reorganization procedure (a) to anticipate liquidation of its assets ormake payments through ruinous or fraudulent means (b) to practice or try to practice simulatedoperations or to alienate all or part of its assets to third parties creditor or not with the objective todelay payments or fraud creditors (c) to transfer establishment to third party creditor or not without theconsent of all creditors and without remaining with sufficient assets to solve its liabilities (d) tosimulate transfer of its main establishment with the objective to evade legislation or inspection or inorder to damage creditor (e) to give or reinforce guarantees to creditors regarding debts previouslyundertaken without staying with enough assets to pay off its liabilities (f) to absent without leavingrepresentatives and with enough assets to pay creditors or to abandon the establishment or try to hidefrom its domicile headquarter or main establishment g) to refrain from fulfilling on the establishedterm obligation undertaken under the judicial reorganization plan


In order to file for judicial reorganization debtor shall present the following documents (art 51 Law11101) (i) a description of the concrete causes of its economic situation and the reasons for theeconomic-financial crisis (ii) balance sheets of the last three years (iii) complete list of creditors andfull data about the credits (amount maturity date etc) (iv) complete list and data about employees(function salaries etc) (v) regularity certificate from the Commercial Registry articles ofincorporation and acts of appointment of current administrators (vi) a list of private assets of itscontrolling shareholders and administrators (vii) current bank statements and financial applications(viii) certificates of protest registries in the jurisdiction where it is headquartered or domiciled or inwhich it has subsidiaries (ix) a signed list of all judicial claims in which it figures as party includinglabor claims with an estimate of the respecting values that are being claimed


Bankruptcy can be filed by (art 97 Law 11101) (i) the debtor (ii) his surviving spouse any heir of thedebtor or executrix (iii) quotaholder or shareholder of the debtor according to law or companyrsquosarticles of incorporation (iv) any creditor As for judicial reorganization it can be filed by the debtorwho exercises regularly its activities for more than 2 years and that has all of the following requirements

35

(art 48 Law 11101) (i) is not bankrupt or if was in the past all responsibilities thereof have beendeclared extinct by unappealable sentence (ii) has not obtained judicial reorganization concession inless than 5 years (iii) has not obtained in less than 5 years concession of judicial reorganization basedon special reorganization plan for small companies established in Section V of Law 11101 and (iv) hasnot been condemned or have as administrator or controlling partner a person condemned for any of thebankruptcy crimes established in Law 11101 Judicial reorganization can also be filed by survivingspouse debtorrsquos heirs executrix or remaining partner


Court involvement is very extensive in all three insolvency procedures established by Law 11101bankruptcy judicial reorganization and extrajudicial reorganization As we have seen in item 22 eventhe extrajudicial reorganization which in theory is ldquoextrajudicialrdquo in fact is only effective if approvedby the court The law requires constant court surveillance over the insolvency procedures For examplethe administrator in judicial reorganization has to present in court a monthly report on debtorsrsquo activities(art 22IIc Law 11101) Furthermore the importance of court involvement is so strong that it is usualin major cities in Brazil to have specialized courts which only deal with insolvency


In case of judicial reorganization the law establishes that it lasts for 2 years (art 61 Law 11101)However it is possible that in virtue of the reorganization debtor has to assume obligations which canlast for much longer periods In case of Bankruptcy a timeframe is virtually unpredictable Bankruptcyprocedures are usually very lengthy and hardly take less than 10 years to be concluded


As we will detail hereunder both in judicial reorganization and in Bankruptcy the judge shall determinethe publication of an announcement after which creditors shall have 15 days to present their claims orfile divergences (art 7th sect1st Law 11101) After 45 days a new announcement with a new list ofcreditors shall be published (art 7th sect 2nd Law 11101) As this new list may suffer opposition fromthe debtor its shareholders or the District Attorney (art 8th and 13 to 15 Lei 11101) a new general listof creditors approved by the judge shall be published five days after the oppositions have been decided(art 18 Law 11101)


Debtors under judicial reorganization or bankruptcy benefit from the suspension of all legal claims andexecutions with the exception fiscal executions labor claims and demands on uncertain values (art 6th52 III and 99 III Law 11101) Under judicial reorganization debtor benefits from dismissal frompresenting clearance certificates in order to exercise all of its activities except when contracting withthe government or in order to receive fiscal benefits or incentives (art 52 II Law 11101) Debtors mayalso benefit according to the case from (i) new maturity dates and special payment conditions formatured or maturing obligations (ii) individual or collective bargaining agreements which can reduceemployeersquos salaries working hours and compensation (iii) giving in payment or novation of debts (iv)partial sale of assets (v) equalization of financial expenses related to debts of any nature Underbankruptcy on the other hand debtors have the rights (i) to monitor the administration of bankruptcy(ii) to require necessary measures for the conservation of his rights or of the collective assets and (iii)to intervene in the processes in which the bankruptrsquos estate is party or interested requiring whichever islawful and lodging applicable appeals (art 103 sole paragraph Law 11101)


36

Among Brazilian insolvency procedures the closest that resembles a possession process is thepossibility of the owner of an asset which is in power of the debtor to demand its restitution ifBankruptcy is declared (art 85 Law 11101)


Local particularities and red-flags have been addressed in our comments to the other questions


Judicial reorganization has the purpose of promoting the surpass of situations of economic-financialcrisis It seizes to stimulate the economic activity by allowing the maintenance of production sourcesemployeesrsquo jobs and creditorsrsquo interest and by preserving the company and its social purpose (art 47 ofLaw 11101) This means that in order to decide for the application of reorganization instead ofbankruptcy judges may be politically affected by these purposes In practice one can envisage a strongtendency among judges to avoid bankruptcy in order to preserve employeesrsquo jobs

3 Creditor issues


As we will see below unsecured creditors will only be able to receive after creditors who havepreference according to the rank of claims reproduced thereof have been paid


As we will see below in rem secured creditors will only be able to enforce their securities after thecreditors who have preference over them according to the rank of claims reproduced thereof have beenpaid


Yes Set-off applies with preference over all other creditors to debtorsrsquo debts which have matured untilthe date Bankruptcy is declared whether they have matured in virtue of the Bankruptcy sentence or notSet-off will not apply (i) to credits transferred after the declaration of Bankruptcy (except in case ofmerger acquisition spin-off or death) or (ii) to credits which have matured before Bankruptcy isdeclared but have been transferred maliciously or simply because the economic-financial crisissituation of the debtor was already known (art 122 Law 11101)


Not really The rank of claims (art 83 Law 11101) is not affected when it comes to companies whichare part of the same corporate group What matters is the nature of the credit and not the existentcorporate bond (subsidiaryaffiliate etc) between creditor and debtor


Law 11101 does not discipline explicitly any sort of resource available in respect of companyaffiliates Nonetheless as long as creditors agree something in this direction may be created in theory inthe judicial reorganization plan


37

A creditor committee is optional according to Brazilian law It can be constituted by deliberation of anyof creditorsrsquo classes (art 26 Law 11101) In the absence of a creditor committee its attributions shallbe executed by the judicial administrator and in case of incompatibility by the judge The creditorcommittee shall have the following main attributions (art 27 Law 11101) both in judicialreorganization and in bankruptcy (i) to supervise activities and accounts of the judicial administrator(ii) to ensure the good progress of the procedure and the enforcement of law (iii) to notify the judge incase of violation of rights or injury to creditorsrsquo interests (iv) to investigate or give advice on anyclaims from interested parties (v) to require before the judge the summoning of a creditorsrsquo generalassembly (vi) to speak out in the cases established by the law Specifically in judicial reorganizationthe committee has the following attributions (i) to supervise the administration of debtorrsquos activitiespresenting every 30 days report on its situation (ii) to supervise the enforcement of the judicialreorganization plan and (iii) to require before the judge authorization for the sale of fixed assets



Although control change of the company may be a measure taken in order to promote its judicialreorganization (art 50 III Law 11101) as a rule debtorrsquos corporate structure remains the same


During judicial reorganization the company can obtain new loans These new creditors will precedethose established in art 84 Law 11101 (see our comments above) when it comes to receiving from thedebtor (art 67 and art 83 V Law 11101)


Law 11101 does not establish any limitation to this However if this funding arises after judicialreorganization has begun it has to be approved by creditors


Employees are the first creditors to receive in case of bankruptcy (art 83 Law 11101) In case ofjudicial reorganization the reorganization plan can not determine a term superior to 1 year for thepayment of credits deriving from labor legislation or labor accidents which had matured before thereorganization has been filed (Law 11101 in its art 54) The plan also can not envisage a term superiorto 30 days for the payment of credits regarding salaries matured up to 3 months before reorganizationhas been filed up to the limit of 5 minimum wages per employee (R$ 3620)


The declaration of Bankruptcy determines the acceleration of all debtorsrsquo debts (Art 77 Law 11101)On the contrary extrajudicial reorganization plan can not determine the acceleration of debts (art 161sect2ordm Law 11101) As for the filing for judicial reorganization in spite of the omission in the law inpractice the majority of the agreements establish acceleration clauses


38


See answer to the next question


After the filing for the judicial reorganization (art 52 sect1st Law 11101) or the sentence in thebankruptcy procedure (art 99 sole paragraph Law 11101) the judge shall determine the publication ofan announcement after which creditors shall have 15 days to present their claims or file divergencesregarding the credits that have been listed in the announcement (art 7th sect1st Law 11101 After that thecompanyrsquos appointed administrator shall have 45 days to analyze the new claims and divergences andpublish a new announcement with a new list of creditors (art 7th sect 2nd Law 11101) The debtor itsshareholders and the District Attorney may oppose to this new list of creditors (art 8th and 13 to 15 Lei11101) In any case five days after the oppositions have been decided a general list of creditorsapproved by the judge shall be published (art 18 Law 11101)


According to art 83 Law 11101 the rank of claims is as follows (i) credits arising from laborlegislation limited to 150 minimum wages by creditor (currently R$ 108600) and those arising fromlabor accidents (ii) in rem secured credits up to the limit of the encumbered assets (iii) tax creditsregardless of their nature and date of constitution with the exception of tax fines (iv) credits withspecial privileges as established by applicable law (notably art 964 of the Civil Code) (v) credits withgeneral privileges such as those arising from goods and services which continue to be providedregularly during the period of judicial reorganization in any case limited to the value of the goods andservices rendered during the reorganization period (art 67 sole paragraph Law 11101) and othersestablished by applicable law (notably art 965 of the Civil Code) (vi) unsecured credits such as theoverbalance of credits not covered by in rem securities and the overbalance of credits arising fromlabor legislation which exceed the limit of 150 minimum wages (vii) contractual fines and otherpenalties for the infraction of criminal or administrative laws including tax legislation (viii)subordinated credits such as those established by law or contract and those regarding payment ofshareholders or directors who are not employees Furthermore previously to the payment of all debtsmentioned above the following amounts are due (art 84 Law 11101) (i) payment of the appointedjudicial administrator and his assistants (ii) credits arising from labor legislation or from laboraccidents regarding services rendered after bankruptcy has been declared (iii) amounts rendered bycreditors to the bankruptcy estate (iv) expenses with collection administration realization of assets anddistribution of products as well as expenses with the bankruptcy procedure (v) judicial expensesregarding claims and executions in which the bankruptcy estate has been defeated (vi) obligationsresulting from judicial acts validly practiced during the judicial reorganization or after the declarationof bankruptcy and (vii) taxes regarding taxable events which occurred after the declaration ofbankruptcy


Complex issues arising by virtue of the insolvency have been already addressed in our comments to theother questions



39

Yes According to art 58 Law 11101 court may grant judicial reorganization based on a plan that hasnot been approved by creditors pursuant to the law as long as it has obtained in the same creditorsrsquomeeting (i) favourable vote of creditors which represent more than half of the value of all creditspresent at the meeting regardless of their classes (ii) the approval of two classes of creditors or incase of only two classes with voting creditors the approval by at least one of them (iii) favourable voteof more than 13 of creditors in the class that rejected the reorganization plan and (iv) lack ofimposition by the plan of different treatment between creditors of the class that rejected the plan


Judicial reorganization is formally concluded with a sentence which is rendered after the fulfillment ofall obligations which mature up to two years after reorganization has been granted (arts 63 and 61 Law11101) Bankruptcy is also formally concluded with a sentence (art 156 Law 11101) which will takeplace after the distribution of debtorsrsquo assets among creditors (art 154 Law 11101) and thepresentation of a final report which shall indicate all payments that were made specifying the remainingresponsibilities (art 155 Law 11101)


In a rough way we can say the lower a credit class is placed in the rank of claims (arts 83 and 84 Law11101) the gloomier is the chance of the creditor being paid One must remember that if a company isfacing bankruptcy its capacity to pay its debts is inferior to the amount of debts it has Therefore inpractice chances that low-ranked creditors such as unsecured creditors end up not receiving theirpayments are very considerable



As per our answer to question 22 Law 111012005 provides for an extrajudicial reorganizationprocedure which is less formal than judicial reorganization Extrajudicial reorganization is a procedurebased on free negotiation of a reorganization plan between debtor and creditors (art 161 Law 11101)However it can hardly be regarded as ldquonon-formalrdquo or even ldquoextrajudicialrdquo since it has to beapproved in court in order to be effective (art 165 Law 11101)


Law 11101 provides for an abbreviated and simpler procedure of judicial reorganization for smallcompanies According to this procedure a creditorsrsquo meeting is not summoned and the judge will grantthe judicial reorganization automatically if the applicable requirements are fulfilled Claims andexecutions as well as prescription regarding credits which are not part of the reorganization plan arenot suspended The requirements are the following (i) the reorganization plan shall include onlyunsecured credits (ii) the credits shall be paid in monthly installments (up to 36) adjusted for inflationplus 12 per year interest rate (iii) the first installment shall be paid up to 180 days after filing and(iv) the increase of expenses and hiring of employees has to be authorized by the judge



40



Theoretically speaking recognition and enforceability of foreign decisions in insolvency proceedings ispossible However this option is not very attractive to foreign creditors which prefer to claim theircredits directly before the local Brazilian courts thus avoiding a probably lengthy and uncertainoutcome of the recognition process with the Superior Court of Justice (STJ) In addition the applicationfor the recognition and enforceability of foreign insolvency decisions could be particularly harmful tothe debtorrsquos interests as he would have no protection until the foreign insolvency decision isrecognized In practice therefore local subsidiaries of foreign groups who are in trouble will usuallyfile for protection individually directly with the Brazilian courts This means that the Brazilian courtswill have jurisdiction over the assets of this subsidiary and will apply Brazilian law to the insolvencyproceedings In this case probably no foreign insolvency proceeding will effectively interfere with it Afamous example of this is the Parmalat case in which the Brazilian subsidiary Parmalat SA Induacutestriade Alimentos has filed for reorganization in Brazil despite of the fact that there was already aninsolvency procedure regarding Parmalat SpA taking place in Italy

41

Canadaincluding Quebec specific variations

Richard R Wozenilek Partner Keel Cottrelle LLP

wwwkeelcottrellecom email rwozenilekkeelcottrelleonca tel +1(416) 367-7690

Me Jean-Franccedilois Leacutepine Partner LAMARRE-LINTEAU amp MONTCALM

wwwlllmqcca email jflepinelllmqcca tel +1 (514) 396-6497



A creditor may take a security interest by way of a charge mortgage lien pledge or any other form ofagreement which evidences the granting of a security interest The following are required in order tocreate a valid security interest value must have been given the debtor must have had rights in thecollateral and the debtor must have entered into a security agreement In general Canadian law does notfocus on the different forms of security interests (ie pledge mortgage or charge) Instead the legalfocus is on whether the creditor perfected its validly attached security interest by way of registrationor possession Perfected secured creditors will have priority over unperfected security interestsAlthough a security interest need not be perfected in order to be effective upon the debtor beingadjudged bankrupt an unperfected secured creditors rights will be equivalent to those of the debtorsgeneral creditors

Security interests over personal property and real property are regulated by provincial legislationHowever Canadian chartered banks may also obtain a special form of security interest over certainforms of property under the federal Bank Act

In Queacutebec a creditor may take security over assets by way of a conventional hypothec


Trustees in bankruptcy and in some cases creditors are afforded several remedies for the review ofpre-bankruptcy transactions Generally these remedies can be categorized in regards to

(i) transactions unfairly preferring one creditor over another

(ii) transactions for consideration conspicuously below fair market value

(iii) transactions made with the intent to defeat hinder delay or defraud creditors including bulk sales

In addition in some circumstances trustees and creditors may turn to various corporate remedies

42

available under federal and provincial legislation to obtain relief from the fraudulent behaviour of adebtor

In Queacutebec if the transaction is made in fraud of the companyrsquos creditors in particular where the debtorrenders or seeks to render himself insolvent or by which being insolvent he grants preference toanother creditor the transaction is vulnerable to attack This provincial remedy roughly equivalent tothe remedy provided in the Fraudulent Conveyances Acts is called Paulian action and is available to thetrustee


Corporate legislation in Canada both federally and provincially places fiduciary obligations and dutiesupon the directors of a corporation Generally speaking these fiduciary obligations require everydirector to act honestly and in good faith with a view to the best interests of the corporation and toexercise the care diligence and skill that a reasonably prudent person would exercise in comparablecircumstances Directors and officers owe their fiduciary duty of loyalty to the corporation not to itsshareholders or creditors even where the corporation is in the shadow of insolvency However incontrast to their fiduciary obligation when a company is insolvent or in financial distress a director orofficer may owe a duty of care to a variety of new stakeholders including the companys creditors whomight pursue an oppression or derivative claim against the directors

In addition to the duties noted above directors can also face various statutory liabilities For exampledirectors can be liable for improper distributions and a certain portion of unremitted taxes unpaidemployee wages and vacation pay

In Quebec directors might be held liable to creditors in respect of either contractual or extra-contractual obligations Contractual liability arises where the director personally guarantees acontractual obligation of the company Liability also arises where the director personally acts in amanner that triggers his or her extra-contractual liability If breach of the standard of care causation anddamages are established creditors can resort to extra-contractual liability to have their rightsvindicated Directors and officers will not be held to be in breach of the duty of care if they actprudently and on a reasonably informed basis The decisions they make must be reasonable businessdecisions in light of all the circumstances about which the directors or officers knew or ought to haveknown

2 Taking action


Once insolvent a debtor may initiate several different actions designed to protect itself while it attemptsto reorganize its affairs

Companies Creditors Arrangement Act (ldquoCCAArdquo) - a debtor corporation may seek court protectionfrom its creditors while reorganizing its affairs under the federal CCAA The qualifying debtor

43

corporation may bring an application to the court for an order directing a stay of proceedings against itwhile it formulates a plan of compromise or arrangement between itself and its creditors In general thedebtor seeking such protection must meet several requirements including

(i) be an entity falling within the CCAAs definition of a company

(ii) if the company is an incorporated entity not constituted under any Canadian federal or provinciallaw the debtor must have assets or do business in Canada

(iii) be insolvent or bankrupt and

(iv) have debts of at least $5000000 CAN

Bankruptcy and Insolvency Act (ldquoBIArdquo) - the insolvent debtor may also avail itself of the provisions ofthe federal BIA dealing with proposals made to unsecured creditors The reorganization sections of theBIA are designed to permit an insolvent debtor to make a proposal to its creditors for the compromise ofits debts to them upon acceptable terms and thereby avoid bankruptcy During a proposal-basedreorganization the debtor remains in operational control of its assets and liabilities and remains vestedwith them The proposal is a contract that if duly filed and accepted by the requisite majorities ofcreditors and ratified by the court binds the debtor and its affected creditors to the terms thereof(assuming its preconditions if any are fulfilled) However since the BIA does not bind or affectsecured creditors such a proposal cannot bind or affect the rights of secured creditors which isregulated by provincial legislation As a results the co-operation of secured creditors to a proposalmust be obtained independently If the proposal is rejected by the debtors creditors then the debtor isdeemed to have made an assignment in bankruptcy and formal receivership proceedings may commence


The debtors decision to undertake a formal restructuring will generally come as a last resort after otheroptions have failed Often the debtor will seek other solutions such as the injection of new capital andinformal debt arrangements with its creditors If all the creditors agree on the debtors settlement termsthe threat of formal insolvency proceedings can be avoided If such other avenues are not feasible thenthe debtor will be faced with the possible liquidation of its assets


As the primary purpose of all proceedings is to balance the interests of a debtor with those of itscreditors none of the procedures grants any particular advantage to the creditor or the debtor It isimportant to note that while the Companies Creditors Arrangement Act is focused on the restructuringrather than the liquidation of a company a plan of compromise or arrangement proposed pursuant to theCCAA must still be approved by the companies creditors and the court


One or more creditors may file an application for a bankruptcy order if the debt owing to the applicantcreditor amounts to at least $1000 and the debtor has committed an act of bankruptcy within six monthspreceding the filing of the application There are ten different ldquoacts of bankruptcyrdquo enumerated in theBankruptcy and Insolvency Act Most of these acts of bankruptcy are rarely used The acts of bankruptcymost commonly relied on are the following the debtor has ceased to meet its liabilities generally as theybecome due the debtor has permitted an execution or other process under which the debtors propertycould be seized or taken in execution to remain unsatisfied for certain specific time limits and thedebtor has made a fraudulent conveyance gift or transfer of property in Canada or elsewhere

44


In order to initiate an involuntary bankruptcy one or more creditors may bring an application for abankruptcy order against a debtor by filing the application in the court having jurisdiction in the judicialdistrict of the locality of the debtor The applicant must also serve the application on the debtor andhaving the application heard in the court The applicant bears the onus of showing that the applicationhas been made in the proper jurisdiction ldquoLocality of a debtorrdquo means the principal place where thedebtor has carried on business during the year immediately preceding bankruptcy where the debtor hasresided during that year or in cases not meeting these requirements where the greater part of thedebtors property is situated

A voluntary bankruptcy does not require court proceedings and involves a debtor assigning its propertyto a licensed trustee in bankruptcy in the form of a simple assignment document


The courts involvement in an involuntary bankruptcy can be quite high For example in a proceedingunder the Bankruptcy and Insolvency Act the court will hold a hearing regarding the bankruptcy petitionand will require proof of the facts alleged in the petition The proof initially is by affidavit but if thedebtor disputes the petition there will be a trial as to whether the debtor should be adjudged bankrupt Ifthe court is satisfied it may make a receiving order and appoint a trustee in bankruptcy nominated by thepetitioning creditors

The court is also highly involved in regards to plans under the Companies Creditors Arrangement ActThe court retains discretion over whether to order a creditors meeting and may refuse to make such anorder - and thereby effectively refuse to allow the debtor to put its CCAA plan to a vote - if itdetermines that the creditors best interests would not be served Furthermore even if the creditorsapprove the debtorrsquos plan by the requisite majority the court still retains discretion over whether tosanction the terms of the plan


The length of a bankruptcy proceeding in Canada varies depending on the circumstance Somebankruptcies might take less than a year while more complicated major bankruptcies often take longer Abankrupt company cannot apply for a discharge from bankruptcy until it has satisfied the claims of itscreditors in full In comparison an individual bankrupt may apply for automatic discharge frombankruptcy as early as nine months after becoming adjudged bankrupt


An application for a bankruptcy order must be signed by the registrar and the application materials mustbe served on the debtor at least 10 days prior to the bankruptcy hearing An affidavit proving service ofthe application materials must be filed with the court at least two days before the date set for thehearing Furthermore within five days of being appointed the trustee in bankruptcy is required topublish notice of the bankruptcy and the first meeting of creditors in a local newspaper


The major benefit of pursuing the restructuring mechanisms available under the Companiesrsquo CreditorsArrangement Act or the Bankruptcy and Insolvency Act is that all legal proceedings against the debtorwill be stayed in order to give the debtor breathing room to continue its affairs while restructuring itsdebts Furthermore once a plan or proposal is approved the parties will be bound by its terms and thedebtorrsquos bankruptcy will be annulled by the court (unless the debtor fails to fulfill its obligations under

45

the plan or arrangement)


The restructuring mechanisms available under both the Companiesrsquo Creditors Arrangement Act and theBankruptcy and Insolvency Act are somewhat functionally equivalent to US Chapter 11 debtor inpossession process For example like the US Chapter 11 process both the CCAA and BIA allow for abroad stay of legal proceedings preventing creditors from taking any action against the debtor companyThey also impose a general moratorium on the payment of debt existing at the date the debtor filed forprotection in order to allow the debtor to develop a plan or proposal with its creditors Debtors utilizingthese processes can also be authorized to sell their assets through a court-supervised process and mayalso obtain DIP financing Furthermore the debtor will remain in possession and control of the companyduring both of these restructuring processes as long as it fulfills its obligations under its approvedrestructuring plan or proposal


Although the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act are federalstatutes enacted by the Parliament of Canada it is important to remember that pursuant to theConstitution of Canada the rights of secured creditors are governed by the individual provincesTherefore during any insolvency proceedings it is essential to review the applicable provinciallegislation in order to determine how the rights of secured creditors might affect the process Forexample the following are some of the statutes one would need to review in order to determine therights of secured creditors in Ontario

(i) Personal Property Security Act RSO 1990 c P 10

(ii) Repair and Storage Liens Act RSO 1990 c R 25

(iii) Mortgages Act RSO 1990 C m 40

In Queacutebec the following are the some of the securities one would need to review in order to determinethe rights of secured creditors (i) Security trusts Art 1261 Queacutebec Civil Code (ldquoQCCrdquo) (ii) Rightsof retention Art 1592 QCC (iii) Suretyship Art 2333 QCC (iv) Prior claims of municipalitiesand school boards constituting real rights Art 26541 QCC (v) Hypothecs on moveable andimmovable property Art 2660 QCC (vi) Claims of persons having taken part in the construction orrenovation of an immovable Art 2724 QCC (vii) Ownership securities Art 1745 (Instalment sales)1750 (Sales with right of retention) 1842 (Leasing) Despite the current convergence between Queacutebecand the remaining provinces towards functionalism Quebecrsquos official focus is still form Queacutebecrsquoscollaterals specifically involve the granting of a real right that will follow the pledged asset inwhoeverrsquos hands it may be Publication which is the equivalent of perfection determines rank Someownership securities such as leasing and claims assignments in true ownership (factoring agreements)require no registration to be validly set up


There are no major political issues other than the ordinary public or media concerns that come with anybankruptcy proceeding

In Queacutebec several publically-owned corporations have a key-role in the economic reality of QueacutebecThese publically owned corporations will often be driven by policy concerns

46

3 Creditor issuesHow are unsecured creditors affected

Once a debtor is adjudge bankrupt it no longer has to make debt payments directly to unsecuredcreditors as they are then represented by the trustee in bankruptcy Furthermore any court proceedingsthat have already been commenced by an unsecured creditor may not be continued without leave of thecourt During formal bankruptcy proceedings unsecured creditors have no proprietary claim against thebankrupts assets but are entitled to share in the trustees distribution of the proceeds realized from thebankrupts assets In addition to the right to receive distributions from the bankrupts estate unsecuredcreditors may participate in the governance of the estate by voting at meetings of creditors for exampleto elect inspectors who guide the trustee in the performance of its duties A secured creditor may also bean unsecured creditor and participate in distributions and estate governance in the same way as otherunsecured creditors to the extent that the value of the secured creditors collateral is insufficient tosatisfy its creditor claim


A secured creditor would enforce its security in the same way as if the debtor was not bankrupt Thetwo main remedies available to the secured creditor are power of sale proceedings and foreclosureactions Essentially power of sale proceedings allow the secured creditor after providing notice ofdefault to the debtor and other creditors to seize and sell the collateral and apply the proceeds of suchsale to the debt owing Secured creditors have the right to enforce their security for the full amount of thedebt If the value of the debt exceeds the proceeds realized from the seizure and sale of the collateralthe secured creditor will rank as an unsecured creditor for the balance In enforcing its security thesecured creditor must take reasonable precautions to obtain the fair market value of the property at thetime when the property is sold and any surplus obtained by the secured creditor from sale proceedingsmust be held in trust for the debtor and other remaining creditors Foreclosure on the other hand is theprocess by which the secured creditor obtains full legal and beneficial title to the collateral in completesatisfaction of its debt In order to foreclose the secured creditor must provide notice of its intent to doso at which point the debtor and other creditors may challenge the proposed foreclosure on certainstatutory grounds

Although the stay of proceedings arising on a bankruptcy does not stay a secured creditors right to seizeor sell collateral subject to its security a court may grant a stay of a secured creditors rights for up tosix months However this power is rarely exercised in a bankruptcy proceeding

In Queacutebec the four remedies are the taking possession for purposes of administration the taking inpayment the sale by creditor and the sale by judicial authority A creditor intending to exercise ahypothecary right must give and file a prior notice

The practical advantage of taking possession for purposes of administration is to benefit from the shorterten day delay before the debtor can be forced to surrender the property It also helps alleviating fraudThe creditor who has through his administration obtained payment of the debt is bound to return to theperson against whom the hypothecary right was exercised in addition to the property any surplusremaining in his hands after payment of the debt

47

The taking in payment consists in taking the hypothecated property in complete payment of the debtTaking in payment extinguishes the obligation A creditor who has taken property in payment becomesthe owner of it from the time of registration of prior notice He takes it as it then stood and free of allreal rights published after his Where at the time of the creditorrsquos prior notice the debtor has alreadydischarged one-half or more of the obligation secured by the hypothec the creditor has to obtainauthorization from the court before taking property in payment

A creditor who holds a hypothec on the property of an enterprise may after obtaining the surrender ofthe property proceed with the sale by agreement by a call for tenders or by public auction Finally acreditor may proceed to the sale by judicial authority

A creditor holding a hypothec on a claim may even without prior notice withdraw his authorization tothe grantor to collect the claim


A creditors right of set off against an insolvent debtor applies to all claims made against the debtorsestate and to all actions instituted by the trustee for the recovery of debts due to the debtor unless theset-off would amount to a fraudulent preference If a creditor can prove that the right of set-off was aregular contractual term in its business dealings with the insolvent debtor a court is unlikely to find afraudulent preference

In Queacutebec there are slight differences between legal compensation in Quebec and legal and equitableset-off in the common law provinces A creditorrsquos right to set off his debt against an insolvent personarises at two conditions (1) the two debts coexist and (2) the debts are certain liquid and exigible Asfar as their coexistence is concerned the debts must arise from contracts that existed prior to the date ofbankruptcy When debts are not exigible set-off remains possible if the debts result from the samereciprocal relationship or at the very least if there is sufficient privity between the contracts a commonobject and a common cause between those contracts In theory equitable set-off is not available inQueacutebec


There is no difference between inter-company debts and debts from other creditors Paying inter-company debts before other creditors debts may constitute a fraudulent preference


If the bankruptrsquos estate includes securities in an affiliated company then those securities would beavailable for liquidation However creditor recourse against an affiliated company itself is generallyunavailable unless the affiliated company guaranteed the debts of the debtor Nevertheless there is thepossibility that a ldquocomplainantrdquo (ie a trustee or creditor) might be able to bring a statutory ldquooppressionclaimrdquo against an affiliate in order to remedy oppressive conduct


Upon being appointed the trustee in bankruptcy is required to call a meeting of creditors At such ameeting the creditors may appoint up to five inspectors by ordinary resolution Any person who is aparty to a contested action or proceeding relating to the bankrupts estate may not be made an inspectorCorporations also may not be an inspector During the administration of the bankruptrsquos property andmaking distributions to creditors the trustee is required to have regard to any directions given in

48

resolutions by the inspectors Where however there is a conflict between directions given to the trusteeby the inspectors and a resolution by the creditors the resolution by the creditors overrides theresolution of the inspectors Where the trustee disagrees with a direction given by the inspectors thetrustee may request that the court review the matter If the inspectors fail to exercise their powers thetrustee is required to call a meeting of the creditors for the purpose of

(i) substituting other inspectors and

(ii) permitting the creditors to take any action or give any directions that may be necessary for thetrustee to administer the estate



When a debtor files for protection under either the Bankruptcy and Insolvency Act or the CompaniesCreditors Arrangement Act there is no transfer of assets to any trustee or third party as there is with anassignment into bankruptcy The debtor remains in possession and control of its assets and operations toprovide it with a chance to restructure Unless there is a court order to the contrary the incumbentdirectors remain in charge of the company However until the plan or arrangement is approved by thecreditors it is the trustee monitors duty to monitor the debtor companys business and financial affairswith a view to providing information to the court and interested stakeholders

Once the debtor is adjudged bankrupt it ceases to have any legal capacity to dispose of or otherwisedeal with its property Therefore subject to the rights of the secured creditors the bankruptrsquos propertywill automatically vest in the trustee in bankruptcy


The restructuring mechanisms under both the Bankruptcy and Insolvency Act and the CompaniesCreditors Arrangement Act allow a court to authorize DIP financing The court may also authorize thecreation of a super priority charge against the debtors assets in favour of and to secure obligationsowed to the DIP lender On a debtors application and on notice to secured creditors likely to be affectedby the security or charge a court may make an order declaring that all or part of the debtors property issubject to a security or charge the court may do so in the amount it considers appropriate in thecircumstances and in favour of the parties who have agreed to lend money to the debtor during theproceedings However no pre-filing obligations may be secured by the charge as only debt incurredpost-filing may be secured by the charge When determining whether to approve of DIP financing and therelated super priority charge a court must generally consider the following factors

(i) the period during which the debtor is expected to be subject to the restructuring proceedings

(ii) how the debtors business and financial affairs will be managed during such proceedings

(iii) whether the debtors management has the confidence of the debtors major creditors

(iv) whether the DIP loan would enhance the prospects of a viable proposal arrangement being madewith the debtorrsquos creditors

(v) the nature and value of the debtors property

49

(vi) whether any creditor would be materially prejudiced as a result of the DIP lenderrsquos security orcharge

(vii) the trusteersquos monitors recommendations in conjunction with cash-flow statements


Generally employment relationships continue while a debtor corporation is restructuring under eitherthe Bankruptcy and Insolvency Act (ldquoBIArdquo) or the Companies Creditors Arrangement Act (ldquoCCAArdquo)However the employer is always able to terminate an employment relationship as long as suchtermination does not contravene applicable labour and employment laws Furthermore a court may notapprove a plan of arrangement or proposal under the restructuring provisions of either the BIA or CCAAunless the plan or proposal provides for the immediate post-sanction payment of all wages andcompensation employees would have otherwise been entitled to receive had the company becomebankrupt (see below regarding employeesrsquo entitlements upon bankruptcy) Furthermore a court may notapprove a plan or proposal unless it provides for the immediate payment of specific prescribed pensionplan obligations However despite these statutory obligations it is important to note that the SupremeCourt of Canada recently held that a court ordered super-priority in favour of a DIP lender may validlyoutrank the interests of all other creditors during the restructuring process including the interests ofpension plan beneficiaries

Once a company is adjudged bankrupt its employees will enjoy a super-priority charge on theiremployerrsquos assets to the extent of $2000 per employee for amounts owing as wages salariescommissions or compensation for services rendered within six months prior to bankruptcy For thepurposes of this super-priority the notion of ldquocompensationrdquo includes vacation pay but expresslyexcludes termination or severance pay The claim of an employee for such severance or termination payis thus not covered by the super-priority This super-priority has priority over all security affecting thebankrupts ldquocurrent assetsrdquo and is only subordinate to the property claims of unpaid suppliers farmersfisherman and certain deemed trusts It is also important to note that the directors of a debtor companymay remain personally liable for a certain portion of unpaid wages or vacation pay under provincial andfederal labour and corporate statutes Furthermore since 2008 employees have enjoyed rights under theWage Earner Protection Program (ldquoWEPPrdquo) This program provides that upon the bankruptcy of anemployer employeesrsquo claims admissible under the WEPP will be paid out by the Crown in order toexpedite payment of such amounts to employees Upon payment to the employees the super-prioritycharge noted above will be subrogated to the Crown

Apart from priority claims for unpaid wages there is also a super-priority for claims related tounremitted pension contributions This pension super-priority charges all of the assets of the bankruptemployer and is thus not limited in scope to ldquocurrent assetsrdquo as is the case for the wages andcompensation super-priority noted above


When a debtor enters into restructuring (whether under the Bankruptcy and Insolvency Act or theCompanies Creditors Arrangement Act) its executory contracts and the obligations thereunder are notautomatically terminated Post-filing providers of goods or services to a debtor seeking restructuringprotection need not supply the debtor on credit however such post-filing counterparties may notterminate their supply agreements simply because the debtor has sought creditor protection Incomparison debtors having filed for protection may under certain conditions disclaim or resiliatealmost any agreement to which they were a party on the date of their filing There are several relevantconditions and limitations on the power to disclaim or resiliate an agreement including

50

(i) Required notice notice must be given to the trustee or monitor and to the other parties to theagreement and unless there is any disagreement therewith the disclaimer or resiliation takes effect 30days after the notice

(ii) Trustee monitor or court approval no agreement may be disclaimed or resiliated unless the trusteeor monitor has approved of such proposed action If the trustee or monitor fails to approve the debtormay apply to the court for an order permitting the disclaimer or resiliation

(iii) Right to contest a party to the agreement has the right to contest the proposed disclaimer orresiliation provided it applies to the court (upon notice to the relevant parties) to challenge the noticethereof within 15 days of its receipt If its challenge is rejected by the court the disclaimer or resiliationtakes effect 30 days from the debtors notice or other date established by the court

(iv) Provable claim If an agreement is disclaimed or resiliated a party to the agreement who suffers aloss in relation to the disclaimer or resiliation is considered to have a provable claim in bankruptcy

(v) Debtorrsquos reasons - Within five days a debtor must provide written reasons for a proposeddisclaimer when requested to do so by a party to the agreement being disclaimed

Note that there may be special rules in regards to the ability to disclaim or resiliate commercial realestate leases or intellectual property rights



The trustee in bankruptcy is charged with managing the procedure by which creditors assert and provetheir claims against the bankrupt estate The Bankruptcy and Insolvency Act provides that all debts andliabilities present and future to which the bankrupt is subject at the date of the bankruptcy or to whichhe or she may become subject before his or her discharge by reason of any obligation incurred beforethe date of the bankruptcy shall be deemed to be provable claims A creditor must prove its claim to beentitled to share in any distribution that may be made by the trustee A proof of claim may be signed andsubmitted by the creditor or someone authorized by the creditor In the case of a corporation the proofof claim may be submitted by an officer or employee of the creditor corporation provided that he or shestates his or her position and affirms knowledge of the circumstances connected with the claim Theproof of claim must refer to a statement of account showing particulars of the claim and must refer toevidence by which it can be substantiated The trustee examines each proof of claim and subject topossible review by the court the trustee may disallow claims in whole or in part subject to thecreditorrsquos right to appeal to the court

Creditors with the significant exception of secured creditors are preclude from asserting claims againsta debtor in bankruptcy directly and must rather prove their claims as a part of the bankruptcy processThe court may however grant permission to a creditor to assert a direct claim under certaincircumstances such as fraud Secured creditors are entitled to realise on their security and need notprove a claim in bankruptcy (though the trustee may contest the validity of a security interest) Securedcreditors are however permitted to prove a claim in bankruptcy for the balance owing after realizing ontheir security


51

There is no specific statutory deadline for when an unsecured creditors must prove its claim to thetrustee in bankruptcy however there are certain statutory deadlines in regards secured claims Wherethe trustee has knowledge of property that may be subject to a security the trustee may require thepotential secured creditor to prove its security interest Where a secured creditor does not deliver aproof of claim to the trustee within 30 days of the trusteersquos request the trustee may with leave of thecourt sell the property free and clear of the secured creditors security


Generally claims against the assets of the bankrupt estate are to be paid in the following order

(i) Statutory super-priorities including

a Crown deemed trusts (employee source deductions)

b Wages and vacation pay of employees

c Prescribed pension plans (amounts deducted from employees remuneration and unpaid to the pensionfund)

d Claims of unpaid suppliers farmers fishermenhellipetc

(ii) Judicial security or charges that may affect the assets of an insolvent person or company seeking torestructure its business and affairs (ie security of a DIP lender)

(iii) Secured creditors

(iv) A certain portion of the claims of an enumerated list of ldquopreferred creditorsrdquo (ie landlords andmunicipal taxing authorities)

(v) Unsecured creditors who are paid rateably up to full extent of their claims

(vi) Certain claims that are subordinate to those of unsecured creditors

(vii) Claims of non-arms length creditors

(viii) Claims of silent partners

(ix) Wage claims of officers and directors

(x) Claims of creditors holding ldquoequityrdquo claims


No



Unlike under the US Chapter 11 process there is no concept of ldquocram-downrdquo in Canada In Canada

52

each class of creditors to which a proposal or plan applies must approve the plan or proposal by therequisite majorities


The formal bankruptcy process is generally complete when the debtor is discharge of its bankruptcy Abankrupt company cannot apply for a discharge from bankruptcy until it has satisfied the claims of itscreditors in full In comparison an individual bankrupt may apply for automatic discharge frombankruptcy as early as nine months after becoming adjudged bankrupt Before a discharge hearing isheld the trustee is required to prepare a report and send notice of the hearing to the Superintendent ofBankruptcy the bankrupt and every known creditor Once the court has considered the dischargeapplication the court can either

(i) Grant or refuse a discharge

(ii) Suspend the operation of a discharge for a specified time or

(iii) Grant a conditional discharge


Please refer to the ranking of creditor claims above



The only way to accelerate the process is by skipping over the restructuring process (ie where a planor proposal has been rejected) and head straight to formal bankruptcy liquidation





In order to be generally consistent with the requirements of the United Nations Commission OnInternational Trade Law Model Law on Cross-Border Insolvency Canadarsquos federal government recentlyamended the provisions of the Bankruptcy and Insolvency Act (ldquoBIArdquo) and the Companies CreditorsArrangement Act (ldquoCCAArdquo) respecting the recognition of foreign insolvency proceedings These new

53

statutory rules generally provide that an application for the recognition of foreign proceedings may onlybe filed by a ldquoforeign representativerdquo Furthermore the following three documents must accompany theforeign representativersquos application

(i) a certified copy of the instrument however designated commencing the foreign proceeding or acertificate from the foreign court affirming the existence of the foreign proceeding

(ii) a certified copy of the instrument however designated authorizing the foreign representative to actin that capacity or a certificate from the foreign court affirming the foreign representatives authority toact in that capacity and

(iii) a statement identifying all foreign proceedings in respect of the debtor that are known to the foreignrepresentative

In the absence of the first two required documents Canadian courts may accept any other evidence of theexistence of the foreign proceedings and foreign representatives authority that the court considersappropriate the court may require a translation of any document accompanying the application If a courtis satisfied that the application for the recognition of a foreign proceeding relates to a foreignproceeding and that the applicant is a foreign representative in respect of the proceeding the court mustmake an order recognizing the foreign proceeding there is no discretion in this regard However theBIA and CCAA provide that nothing prevents a court from refusing to act contrary to public policyFurthermore courts have extensive powers to tailor the orders they grant as they see fit Both the BIAand CCAA provide that an order may be made on any terms and conditions the court considersappropriate in the circumstances

Furthermore it is important to note that a number of Canadian courts including the Ontario SuperiorCourt of Justice (Commercial List) have formally adopted the Guidelines Applicable to Court-to-CourtCommunications in Cross-Border Cases (the ldquoGuidelinesrdquo) originally developed by the American LawInstitute and the International Insolvency Institute It is expected that the Guidelines will facilitate co-operative procedures for insolvency proceedings and other types of commercial disputes involvingcross-border proceedings where court-to-court communications might facilitate in harmonizingproceedings to help ensure consistent results and increase efficiency

54

China

Kevin Xu Partner Martin Hu amp Partners

wwwmhplawyercom kevinxumhplawyercom tel +86 21 50101666



(1) Mortgage including chattel mortgage and real estate mortgage

(2) Pledge including pledge of movables and Pledge of Rights and

(3) Lien


The administrator has the right to apply for invalidation of any of the following acts provided that theact involving the debtors assets was committed within 1 year before the court accepted the bankruptcyapplication






Furthermore unless any such debt settlement is for the benefit of the debtors assets during the last 6months before the court has accepted the bankruptcy application if the company makes a debt settlementwith any individual creditor the administrator has the right to apply to the court to invalidate the actinvalid in following situations

(1) an enterprise legal person is unable to repay its debts as they become due and its assets areinsufficient for the settlement of all debts and

(2) it is clearly insolvent


PRC Bankruptcy Law and PRC Company law set forth as a general principle that any director of acompany that violates his or her duty of care or duty of loyalty thus causing the bankruptcy of thecompany shall be held liable

Furthermore the legal representative of the debtor and other personnel who are directly accountableshall bear compensation liability pursuant to the law when a debtor commits any of the following acts

55

and harms the interests of the creditors

1 if within1 year before the court accepted the bankruptcy application






(6) concealment or transfer of assets for the purpose of debt evasion and

(7) fabrication of debts that are imaginary or fictitious or false admission of debts

2 as prescribed in answer 12 (second bullet point)

A reasonable reading of the law above makes us believe that the director should fall into the category ofldquothe other personnelrdquo and therefore undertake the same obligation

2 Taking action


Company could apply for entering in to three kinds of insolvency procedures after the permits of courtspecifically as

(1) Bankruptcy Liquidation happens when the companies have been announced as bankrupt a liquidationteam will take over the company to handle the liquidation assessment dispose distribution of the assetsunder the bankruptcy

(2) Restructuring gives a chance for the company to reorganize its operation and production to deal withthe creditor-debtor relation to get rid of financial distress with the aim to regain the capacity to operatenormally and

(3) Settlement could be directly applied by the company to court with a settlement agreement and afterthe creditorsrsquo meeting approval and the verdict of the court for the agreement of settlement theagreement of settlement could be enforced


There is an alternative way to reach an agreement of settlement in which case the court will not beinvolved in the preparation or negotiation of the agreement of settlement and the company could reachout-of-court settlement with all the creditors independently The bankruptcy procedure will beterminated upon courtrsquos verdict on approving the agreement


Bankruptcy Liquidation might be considered creditor-friendly and the reconstructing is more debtor-

56

friendly procedure


Where an enterprise legal person is unable to repay its debts as they become due and its assets areinsufficient for the settlement of all debts or where it is clearly insolvent or it is clearly insolvent itmay carry out restructuring pursuant to the provisions of this Law


A bankruptcy application form and the relevant proofs shall be submitted to the court for a bankruptcyapplication Where the application is submitted by the debtor the debtor shall submit a statement ofstatus of assets a debt list a list of its creditors rights the relevant financial and accounting reportsstaff resettlement scheme and a statement of payment of staff wages and contribution of social securitypremiums


The creditor the person(s) who isare responsible for liquidation pursuant to the law could apply forbankruptcy liquidation

Besides the company the creditor the capital contributors whose contribution represents one-tenth ormore of the registered capital of the debtor could apply for reconstructing


Bankruptcy Liquidation the court is entitled to decide whether to accept bankruptcy application or notinvalidate disposal of the debtorrsquos assets in certain circumstances appoint an administrator to managethe assets and corporate management and confirm and valid bankruptcy creditor rights

Reconstructing the debtor needs an approval from the court in order to manage its own assets andoperation under the supervision of administrator The restructuring plan could only become enforceableupon the approval of the court no matter whether the creditorsrsquo meeting has passed the draft or not Inaddition the directors supervisors and senior executives shall not transfer their shares of the companyto any other third parties

Settlement the court is entitled to decide whether the application of settlement shall be accepted makepublic announcement if the application has been accepted the agreement of settlement could onlybecome valid and enforceable upon the approval of the court who could decide to terminate thesettlement procedure if the agreement is considered as invalid one


The duration of insolvency process mostly depends on the complexity of each case and there is nostatuary regulation limiting the entire process of insolvency under PRC laws Generally speaking abankruptcy liquidation procedure takes no less than 3 months and the reconstructing procedure takes noless than 6 months


The public announcement and notices for the creditors to declare their creditor rights shall be made bythe court


57

Bankruptcy the enforcement of all court decisions against the debtor is suspended and the creditors atleast the unsecured creditors are no longer entitled to exercise their rights of enforcement against thedebtor

Reconstructing the debtor could manage its own business and operation under the supervision of theadministrator the security interests over specific assets of the debtor shall be suspended from exercisingduring the restructuring period a capital contributor of the debtor shall not request for a distribution ofinvestment gains Unless an approval by the court has been given no director supervisor or seniormanagement personnel of the debtor shall during the restructuring period transfer hisher equity stake inthe debtor to a third party


DIP is a possible solution under PRC Bankruptcy Law The debtor or its capital contributors whosecontribution represents one-tenth or more of the registered capital of the debtor may apply to the courtfor restructuring During the restructuring period upon application by the debtor and approval by thecourt the debtor may manage its assets and business under the supervision of the administrator Thedebtor shall perform the duties of the administrator in a proper way


No


There are special procedures applicable for the bankruptcy of state-owned companies and financialinstitutes under PRC law

3 Creditor issues


Bankruptcy Liquidation the unsecured creditorsrsquo rights will be affected by the different classes ofcreditors as demonstrated below Generally unsecured creditors need to declare its creditor rightsaccording to public announcement and notice in order to get its creditor rights reconfirmed by the court

Reconstructing the creditors could discuss and vote for the reconstructing plan all the promises madeby the creditors during the reconstructing period would become invalid afterwards however the debtspaid according the plan are still enforceable


Under PRC Bankruptcy Law holders of security interests over specific assets of the bankrupt shall beentitled to a preferential right of repayment in respect of such specific assets Where a creditor exercisesits preferential right of repayment but does not receive repayment in full the remainder of creditor rightswhich have not been repaid shall be deemed normal creditor rights

If the company owes to its workers any wages medical subsidies disability subsidies andcompensation expenses that are required to be included into the basic pension insurance and basicmedical insurance expenses of the individual worker accounts and fails to receive repayment in full theamounts remaining outstanding and prior to the creditorrsquos preferential right

58


The creditor has the right of set-off under PRC Bankruptcy Law

Where a debt is owed by the creditor to the debtor prior to the acceptance of the bankruptcy applicationthe creditor may propose to the administrator to set off the debt

Notwithstanding the foregoing there shall be no set-off in any of the following circumstances

(1) where a debtor of the debtor under consideration has obtained creditor rights to debts against thedebtor under consideration from another party after the acceptance of the bankruptcy application of thedebtor

(2) where a creditor creates a debt owing to the debtor whilst aware that the debtor is insolvent or isaware of the bankruptcy application except wherein the debt was created due to provisions under thelaw or under circumstances that have occurred one year before the bankruptcy application or

(3) where a debtor of the debtor under consideration obtains creditor rights to debts against the debtorunder consideration whilst aware that the debtor is insolvent or is aware of the bankruptcy applicationexcept wherein the creditor rights to debts were created due to provisions under the law or undercircumstances that occurred one year before the bankruptcy application


No


Generally speaking creditors of a company have no recourse against the affiliates of such companies


A creditor committee may be established by the creditors meeting under PRC Bankruptcy Lawmembers of the creditors committee shall obtain a written confirmation issued by the court

The creditors committee shall exercise the following rights

(1) to supervise the management and disposal of the debtors assets

(2) to supervise the distribution of the assets under a bankruptcy

(3) to propose creditors meetings to be convened and

(4) to perform any other duty as entrusted by the creditors meeting



Restructuring in the scenario of a restructuring upon the application by the debtor and approval of thecourt the debtor may manage its assets and business under the supervision of the administrator Wherethe court accepts a bankruptcy application it should simultaneously appoint an administrator An

59

administrator shall perform its duties pursuant to the provisions of PRC Bankruptcy Law and subjectitself to the supervision of the creditors meeting and the creditors committee Creditors who havedeclared their creditor rights pursuant to the law shall be the members of the creditors meetings

Bankruptcy liquidation by the creditors committee

Settlement by the debtor


In China it is difficult for a company in a bankruptcy process to borrow from banks or attracts investorsunless it is able to produce a credible reorganization plan or provide extra securities


Generally PRC Bankruptcy Law provides an option for the debtor or the administrator to arrange DIPfunding The law stipulates that during the restructuring period the debtor or the administrator mayobtain a loan for the purpose of continuing the business and also create a security interest for the loan


If the company owes to its workers any wages medical subsidies disability subsidies andcompensation expenses that are required to be included into the basic pension insurance and basicmedical insurance expenses of the individual worker accounts and fails to receive repayment in full theremainder amounts remain outstanding and prior to the creditorrsquos preferential right


Upon acceptance of a bankruptcy application by the Peoples Court the administrator shall have the rightto decide whether a contract that was concluded between a debtor and another party prior to acceptanceof the bankruptcy application but is still pending completion by the parties shall be continued or berescinded and the administrator shall give such notice of its decision to the other party

Where the administrator does not notify the other party to the contract within two (2) months from thedate of acceptance of the bankruptcy application or does not reply within thirty(30) days from the dateof receipt of a reminder by the other party to the contract the contract shall be deemed rescinded

Where the administrator decides on the continued performance of the contract the other party to thecontract shall perform the contract however the other party to the contract shall have the right to requestfor a security deposit from the administrator Where the administrator does not provide a securitydeposit the contract shall be deemed rescinded



The creditor shall declare the creditor rights to the administrator within the time limit determined by thecourt under PRC laws

(1) Independent declaration of creditor rights creditors shall declare their creditor rights to theadministrator within the time limit When making a declaration of creditor rights the creditor shallprovide documents including but not limited to (a) a statement in writing of the debt amount under the

60

creditors right (b) whether the creditors right to the debt is secured or non-secured and (c) provide therelevant evidence

(2) Joint and several declaration of creditor rights one of the joint and several creditors may beappointed as the representative for all joint and several creditors for a declaration of creditor rights orthe joint and several creditors may declare the creditor rights jointly

(3) Unless the creditors have declared all creditor rights to the administrator the guarantor or joint andseveral debtor shall based on its future right of recourse against the debtor declare creditor rightswhere the guarantor or joint and several debtor has not settled the debts for the debtor underconsideration


The Peoples Court shall upon accepting a bankruptcy application determine the time limit for anydeclaration of creditor rights to be made

The time limit for declaration of creditor rights shall commence from the date of the publicannouncement of acceptance of the bankruptcy application by the Peoples Court and its duration shallnot be less than 30 days or exceed three months from the date of commencement

How will claims rank (313)

The following expenses shall be repaid in the following sequence

(1) bankruptcy expenses and collective debts

(2) wages medical subsidies disability subsidies and compensation expenses owed to workers by thebankrupt which are to be included in the basic pension insurance and basic medical insurance expensesof the individual accounts of the workers and any compensation required to be paid to workers pursuantto provisions in laws and administrative regulations

(3) social security expenses other than those mentioned in the preceding item as owed by the bankruptand unpaid taxes of the bankrupt and

(4) normal bankruptcy creditor rights

Furthermore holders of security interests over specific assets of the bankrupt shall be entitled to apreferential right of repayment in respect of such specific assets


Generally no



Exist

Where the draft restructuring plan is resolved by all the voting groups the restructuring plan shall be

61

deemed approved

Where some voting groups have not resolved the draft restructuring plan the debtor or the administratormay negotiate with the voting groups which have not resolved the draft restructuring plan Such votinggroups may vote again following the negotiation The outcome of the negotiation shall not harm theinterests of other voting groups

Where the voting groups that have not resolved the draft restructuring plan refuse to vote or where thevoting groups have not resolved the draft restructuring plan at the second voting the debtor or theadministrator may apply to the Peoples Court for an approval of the draft restructuring plan where thedraft restructuring plan satisfies the following criteria

(1) security interests over specific assets of the debtor that are held by creditors have been settled in fullin respect of such specific assets pursuant to the draft restructuring plan the damages due to deferredsettlement have been fairly compensated and the security interests have not suffered substantive damageor the voting group has resolved the draft restructuring plan

(2) wages and taxes have been settled in full pursuant to the draft restructuring plan or the voting grouphas resolved the draft restructuring plan

(3) pursuant to the draft restructuring plan the ratio for settled normal creditor rights shall not be lessthan the ratio of settlement based on the bankruptcy liquidation at the time of approval of the draftrestructuring plan or such voting group has resolved on the draft restructuring plan

(4) the draft restructuring plan is fair and equitable for the interests of the capital contributors or thecapital contributors group has resolved on the draft restructuring plan

(5) the draft restructuring plan is fair to all members of the same voting group and the stipulatedsequence of settlement of creditor rights shall meet the legal requirements and

(6) the business plan of the debtor is feasible


See answer 61


See answer 53



See answer 53


See answer 22

62



ILO convention (No173)


Where a foreign courts judgment or ruling on a bankruptcy case that has taken effect involves assets inthe territories of the Peoples Republic of China held by a debtor and an application or request forjudicial recognition and enforcement of the judgment is made to the Peoples Court the Peoples Courtshall pursuant to the international treaty that the Peoples Republic of China has concluded or is amember of or pursuant to the principle of reciprocity examine the application or request make a rulingon recognition and enforcement when meeting the following situation

(1) where the Peoples Court deems that the application or request will not violate the basic principlesof law of the Peoples Republic of China

(2) will not threaten national sovereignty security and public interest and

(3) will not impair the lawful rights and interests of the creditors within the territory of the PeoplesRepublic of China

63

Costa Rica

Doris Rodriguez Partner AG Abogados

wwwag-abogadosnet email drodriguezag-abogadosnet tel 50622570006



In case of default and even if the company has been decreed in bankruptcy over financial difficulties acreditor might take security over assets through the execution or foreclosure of any mortgages pledgeagreements mortgage bonds etc If assets are not secured through the above mentioned methods and thecompany is not in a judicially declared bankruptcy there are other judicial proceedings that allow acreditor to freeze up or seize assets

After the bankruptcy is decreed by the court the company in financial difficulties will be ordered not toenrol any act whether sales mortgages liens etc before the Public Registry a communication will besent to banks and lending institutions to refrain from delivering securities to the debtor company anymail will be sent to the chosen procedural guardian instead to the company and all assets owned by thebankrupt company would be judicially seized So then unsecured creditors would have to presentthemselves to legalize their credit All credits are classified in a) mortgagepledge creditors b) workersc) landlords or tenantrsquos credits d) mass credits (expenses such as legal expenses legal fees personalcosts taxes health care costs food supplied during the pendency of the bankruptcy proceedings etc e)common credits (creditors who never legalized their credits within the bankruptcy process) Only thefirst group can maintain a separate judicial procedure for the credit but it shall be presented or taken bythe same judge of the bankruptcy proceedings


After the declaration of bankruptcy there is a prohibition to take any financial - non approved by thecourt decisions so they wouldnrsquot be vulnerable apart from any judicial recourses or appeals

If the transaction at hand is done before this declaration of bankruptcy it is only vulnerable as a result ofany civilian or criminal judicial pursue of indemnification as a result of a creditorrsquos belief that thecompany in financial difficulties or its directors are acting neglectfully with fraudulent intent or with thepurpose to defraud


Before any declaration of bankruptcy the director is still in charge of taking any administrativefinancialdecisions concerning the company in distress itself If these actions are done within the boundaries ofthe law it is highly difficult for any director to be liable Nevertheless some actions to negotiate with asingle creditor while leaving other creditors outside the lines of any restructuring financial plan maylead to misinterpretations that could potentially end in both criminal complaints ndashfraudulentadministration for instance- or civilian lawsuits ndashsuch as contractual simulation- Consequently anyactions towards the restructuring of any company in distress need to be taken very carefully and with theassistance of the appropriate legal counseling so that no creditors feel disadvantaged or left out

64

After the declaration of bankruptcy is done by a civilian judge there is an examination or qualificationof the bankruptcy by a criminal judge as fraudulent or not and a ldquosuspicion periodrdquo is declared inwhich all debtor acts are considered suspicious and retractable Criminal accusation could arise fromthis investigation stage of the bankruptcy

2 Taking action


Before the declaration of bankruptcy or insolvency there are two formaljudicial procedures that couldoffer a good solution For instance there is a Costa Rican procedure similar to Chapter 13 ndasha processthat refers to the intervention made by the US government to avoid bankruptcy of business orinsolvency of a person- In Costa Rica although very few companies have benefited from thisprocedural treatment there is a proceeding called administration and reorganization by judicialintervention by which a company in a difficult but surmountable financial situation in default or notinvolves itself to resolve its financial problems before and to avoid being declared in a bankruptcystate The request must meet very formal requisites and the candidates to benefit from such proceedingsshould be companies whose disappearance could cause pernicious social effects without substitutabilityoptions There is a variety of this procedure specially intended for financial institutions in whichSUGEF and SUGEVAL are involved

Another formal procedure is established in articles 743 to 759 of our Civilian Procedure Code inwhich a debtor who finds himselfherself in economic and financial crisis can propose a preventiveagreement to its creditors as long as it is not bankrupt insolvent nor in an administration andreorganization by judicial intervention process

Arbitration is another formal possibility with great known results It is always wise to introduce anarbitration clause in all contracts


Informal negotiation is always a possibility in these kind of situations but it should always be directedby proper legal counseling so that any payment arrangements while non-judicial are given the neededformality For instance formalizing the arrangement in a public deed if needed The arrangement couldinclude terms extension debt conversion trust formation the delivery of assets of the debtor aspayment of among others


Any non-judicial payment arrangement or submitting the company to administration and reorganizationby judicial intervention are the only procedures understood as more debtor friendly since they assumethat the company in distress is recoverable and still has realistic options of attending to its debtsBankruptcy ndashintended for merchants- or Insolvency ndashintended for non merchants-1 are overall creditorfriendly proceedings since they could be called upon by any of them in case of any kind of default andthe point is the distributions of assets of the debtor in the best way to cover the existing liabilitiesNevertheless these types of procedures may allow for the debtor to continue to receive salaries and tostop interests from amounting


In Costa Rica the materialistic theory prevails when it comes to defining debtor default it is considered

65

that when the debtor fails to comply with any obligation without taking into account the circumstances itis presumed that the debtor is in default regardless the fact that the debtor may have more assets thanliabilities (liquidity problems) The most usual trigger then for both insolvency and bankruptcy isrightfully proven default as understood above Other triggers are when the debtor is hidden or absentwithout leaving in charge of hisher company or business someone with sufficient power of attorney andproperly trained and with sufficient funds to meet its obligations when the company unreasonably closesits business when transfer of all of the companyrsquos assets in favour of one or more of its creditorsoccurs when fraudulent intent or purpose to defraud is established or any other circumstances that showthat the company is in a state of bankruptcy


The process is a simple request presented to the court and accompanied of different requisitesestablished by law In order to be entitled to ask for the debtorrsquos bankruptcy it is essential for thecreditor to demonstrate the existence of the credit itself as liquid and enforceable obligation and thepresentation of the original executive title or contract To access a bankruptcy case it is essential thatthe debtor is a merchantbusiness even if the cause of the obligation has no commercial character(article 852 Costa Rican Commerce Code) Serving as the basis for the declaration of bankruptcy anyof the securities to which the law gives proper enforceability may be presented A private documentwith no immediate enforceable nature may however serve as basis when according to the courtsjudgment the signature or signatures in the document are regarded as authentic

The debtor company can as well submit itself to the bankruptcy procedure presenting an generalaccounting standing status and details of the credits to its favour causes of the financial status at handstate of losses and incomes date in which default started among others

The insolvency procedure is very similar in structure to bankruptcy

All documentation along with a written request is rendered to the court for approval of thebankruptcyinsolvency application Bankruptcy and insolvency shall be declared by a judge in the samejurisdiction as the personacutes company or businessacutes address


Both creditors and debtors can place the company into bankruptcy or insolvency proceedings In case ofdebtor companies the request must be approved by the shareholders


Once bankruptcy or insolvency is declared court involvement is 100 A guardian is appointed whowill have general power of attorney in case of bankruptcy for example requiring authorization to sellany assets outside the judicial process or negotiate accept any claims or make waivers over assets witha superior value to cent1000000 Overall this makes the guardian pretty restricted to take any decisionson his own without the intervention of either the creditorrsquos committee or the judge The judge presidesand conducts all operations in bankruptcy until its closure performing a complex function sometimespredominantly administrative and sometimes exclusively judicial


A bankruptcyinsolvency can last years but the number depends on the quantity and complexity of theassets and liabilities involved that can directly make a process more or less complicated


66

All notices are done though court


The Bankruptcy declaration by the judge irrevocably fixes the position of creditors ceasing of interestaccruing or arrears against the mass of creditors and produces the immediate maturity andenforceability of all obligations of the debtor So far this would be the benefit the debt is no longergoing to be enlarged by time passing but all liabilities will be enforceable right away Bankruptcy isunderstood as a weapon of the creditors to get paid regardless of debtors assets Nevertheless anarrangement could be presented at any point in time before the final distribution of assets but only if thebankruptcy is declared non criminal


Non of the procedures in existence in Costa Rica -already reviewed in point 2 a)- allow the possibilityof retaining possession of assets paying fair market value apart from contractual value Neverthelessthere are good judicial and non-judicial options that alongside with the right legal counseling can offer away out for companies in financial distress


The absence of a more complete bankruptcy system in Costa Rica that includes non judicial butgovernmentally assisted arrangements may allow for the loss of significant economic opportunitiesNotwithstanding Costa Rica bankruptcy law provides for liquidation the shortage of officiallysanctioned bankruptcy cases indicates that the country is not achieving the benefits of a fair and efficientsolution Likewise Costa Rican law does not provide directly the type of procedures similar to therehabilitation found in Chapter 11rsquos of the Bankruptcy Law in the United States Therefore Costa Ricamay not be taking advantage of an important opportunity to return some companies back to viability oreven profitability This could easily be improved through the strengthening and updating of the existinglegal framework As stated in section 8 b) Costa Rican law allows some discrimination against foreigncreditors which has been strongly criticized by international organizations such as the World Bank


R It is highly uncommon for politics to factor their way into a bankruptcy proceeding

3 Creditor issues


As explained before once the assets and liabilities have been put to order the creditors that havepresented themselves to legalize their credits before the court in the bankruptcy or insolvencyproceedings will be categorized in a) secured creditors (mortgages mortgages bonds publiclyinscribed pledges etc)2 b) workers salaries and others since they enjoy a very special privilege overall creditors3 c) credits for landlords and tenants4 d) mass credits ndashjudicial and administrativeexpenses creditscontracts acquired by the guardian other acts and contracts not honoured by thedebtor taxes among others- and e) common credits which are the ones that were never legalizedUnsecured credits since they are mass credits or common credits depending on whether they arelegalized are paid out of what is left after paying the first three categories Having legalized its crediton time the creditor has the right to future distributions but not to past distributions of assets

67


In case of declaration of bankruptcy or insolvency a secured creditor could legalize the credits withinthe bankruptcy or insolvency proceedings This will make the credit enforceable right away instead ofaccording to the date established in the particular contract


Setoff -understood as the debtorrsquos claim that a particular creditor owes the debtor money as well whichshould be subtracted from the amount claimed by the creditor- exists in Costa Rica in the sense thatwhen the court orders the assets and liabilities the debtor shall expose the status of all assets includingthe credits in its favour against any of the creditors that would then be accounted and examined by theguardian legalizing the credits and reported to the judge


A direct intercompany debt transfer involves a loan from one affiliate to another without theparticipation of an unrelated party to the economic group debt that is sometimes generated with lowinterests etc

In recent times and although the legislation is not specifically directed to economic groups due to theeconomic and financial problems companies in economic groups have been experiencing leading themto default bankruptcy has been decreed by judges not only to individual companies but to groups ofcompanies known as groups of economic interest Nevertheless we consider this should be legislatedin detail and accordingly to the importance of this type of organizations nowadays So if all companiesof the economic group are domiciled in Costa Rica there should be no problem as they would be treatedas the same bankruptcy If the debt issue is between a foreign and a national branch what is stated insection 8 b) should be observed


No there are no creditor recourses available in respect to any company affiliates if they are consideredas part of the same group of economic interest


The creditors committee do exist in our jurisdiction consisting of a group of people pursuing a singlegoal in case of bankruptcyinsolvency the liquidation of the debtors assets and the satisfaction of theirown economic interests It is a committee of continuous presence in the bankruptcyinsolvencyproceedings Its role is the knowledge and legalization of credits authorizing the guardian to performone or more of the acts set forth in section 2 g) above approving the continuation of a business of thebankrupt to facilitate settlement or liquidation hear and resolve questions or issues proposed by theguardian etc



All judicial procedures even if they are not specifically bankruptcy establish the appointment of aguardian that will have different capabilities according to the procedure at hand The appointed guardianwill have power of attorney ndashin different capabilities- but its actions will be reined by the creditoracutes

68

committee and overseen by the judge in most procedures


The Costa Rican system allows a third party to pay for the debtor if it is allowed by the creditoracutescommittee and admitted by the judge Whichever arrangement exists behind the scenes between the thirdparty and the debtor is of no importance to the bankruptcy or insolvency proceedings which could bedeclared extinct due to payment


Debtor in Possession funding does not exist in Costa Rica although as stated before extrajudicialarrangements are allowed in some circumstances even if bankruptcy or insolvency have already beendeclared


As stated before employees enjoy a special kind of privilege in bankruptcy or insolvency proceedingsThe guardian is obliged to pay the notice severance pay and compensation for damages if any within30 days of the formal recognition of credit The bankruptcy of the employer is considered ground fortermination of the employment contract without liability to the employee so no employees will lose anyapplicable labor rights


Contracts would have to be approved by the creditorrsquos committee and entered to by the companyrepresented by the guardian



Each one of the creditors would have to legalize or present their credit within the proceedings in orderto participate in the creditorrsquos committee ndashmay it be administration and reorganization by judicialintervention preventive judicial arrangement bankruptcy or insolvency- but each proceeding hasdifferent requisites to do so For bankruptcy for example the creditor must legalize the credit by filingalong with the request whichever document that satisfactorily evidences the contractual obligationoriginating the liability


Timing for credit legalization in bankruptcy will occur according to the period the judge has establishedfor such in the formal declaration of bankruptcy -887 Commerce Code-


This subject has already been reviewed in section 3 a) above


No in Costa Rica there are no insolvency officers The insolvency or bankruptcy proceedings are

69

handled as explained in this same document through the court if the company or person decides tosubmit to any of the formal procedures There are no insolvencybankruptcy proceedings through otheradministrative or governmental institutions



The study of the 4 different classes of Costa Rican procedures applicable in case of a person orbusiness in financial trouble shows that the most important organ of any one of the proceedings it is theJudge since it is heshe who leads and ultimately approves the actions and agreements of the otherorgans such as the guardian and the creditors committee This is accepted due to the understanding ofthe judge figure as one of impartiality especially in a process where there are many interests involvedand sometimes opposed to each other The judge in Costa Rica is an authority figure who is ultimatelydecides what is best for the mass creditor and the debtor notwithstanding that those involved can appealagainst their decisions According to what is already stated and depending on the eye of the viewerCosta Rican proceedings may be understood as cram-down procedures


A procedure can formally be concluded by agreement between all creditors extrajudicial agreementbetween creditors and debtor or when all assets have been distributed and the final distribution hasbeen done The judge declares the process concluded and sends an edict in that respect to be publishedin the judicial official bulletin


Creditor classes do exist ndash section 3 a) above ndash so it is recommendable to have proper legal counselingwhen you are giving a credit so it is properly backed up and secured in case of financial troubles of thedebtor



Negotiation through legal counseling and arbitration is always a possibility as well as any privatearrangement done with the help of legal counseling


No as explained in section 5 d) above there are no other governmental procedures aside from theformal ones



70


If there is bankruptcy of a Company or Economic Group who has in the Republic one or more branchesor agencies they will be put into liquidation if so requested by the authority responsible for the mainbankruptcy proceedings It has to be taken into account though that any existing assets in the RepublicCosta Rica belonging to one declared bankrupt in another country can only be executed or foreclosedupon by creditors resident in Costa Rica first -980 Civilian Code- and only what has remained afterwill correspond to creditors of the bankruptcy proceedings pending abroad

When bankruptcy is declared to an agency or branch of a foreign company or economic group andnational creditors have not been paid in full after bankruptcy proceedings in Costa Rica their right tocharge any pending amounts to the parent company is recognized

71

Denmark

Peter Wedel Ranch Krarup Partner Mazanti-Andersen Korsoslash Jensen amp Partners

wwwmazanticom email pkmazantidk tel (+45)40103231



Mortgage pledge floating charge assignment and seizure


Several transactions can be deemed voidable transactions for example transactions at prices that differfrom the actual values larger payments mortgages seizures set-offs and other improper transactions

The time frames are typical 3 to 6 months but can be up to 2 years if the transaction is made to benefit arelated party


There is no specific director liability in case of bankruptcy but a director might be liable if he bynegligence has caused creditors to loose money Normally directors will not be liable just because acompany is declared bankrupt

2 Taking action


Reconstruction Covers compulsory composition and controlled selling of assets or activity

Bankruptcy The proceedings will on behalf of all creditors pursue all the assets and divide theproceeds to the creditors in a specific priority

Compulsory winding-up The Commercial Agency will ask the court to initiate winding-up procedure ifthe company does not file the annual report If the company is insolvent the winding-up procedure willbe declared bankrupt


It is possible to agree on a voluntary composition out side the control of the court or through a settlementwith all or only a few of the creditors Since this is based on agreements with the involved creditors itwill only affect these creditors


Reconstruction can be debtor friendly but the creditors have the right to vote against the debtor and can

72

decide that the reconstructor has to take over the management of the company

Bankruptcy will always be creditor-friendly


If the debtor is no longer able to fulfill his obligations as they fall due


A petition for reconstruction or bankruptcy is filed to the court The court will then convene a meeting toconsider the matter If the court finds that the conditions are fulfilled the court will then appoint areconstructor or a administrator (ldquoKuratorrdquo)


Either the debtor or a creditor If the company is under compulsory winding-up the appointed liquidatoras well can file for bankruptcy


Usually the courts involvement will be limited to the bankruptcy petition and the appointing of thereconstructor or the administrator and subsequent decisions in disputes and approving the financialstatement and administrators and reconstructors fees


The length of the proceedings depends on the company and the complexity of the winding-up Normallyit will take between 1 and 3 years


The bankruptcy must be published by the Danish State Gazette (ldquoStatstidenderdquo) The administrator mustalso advice all known creditors so they are made aware that they have to file their claims


The enforcement of all court decisions are suspended and creditors will not be able to pursue claimsand the creditors are prevented from proceeding to executionseizures in the companys assets


No


No


No

3 Creditor issues

73


The unsecured creditors must wait for the bankruptcy proceedings to end and the dividend to be paid inorders of priorities set out below in answer 53


If the administrator hasnrsquot sold the secured asset within 6 month from the initiation of insolvencyproceedings the secured creditor can demand that the administrator sell the secured asset by way ofexecution or foreclosure


The availability of a creditor to set off is limited in bankruptcy but can be allowed in very specifiedsituations The claims need not to be due for payment but the nature of the claims must not exclude set-off


No Inter-company debt is treated in the same manner as all other debts Only the inter-company debtwill not be accepted if the creditors need to vote on subjects regarding the bankruptcy proceedings


An affiliated company will normally not be liable for the bankruptcy of an affiliate and the creditorswill normally not have any recourse against an affiliate


In case of reconstruction or bankruptcy the court might establish a creditors committee if it is deemedappropriate Normally a creditor committee is not established








74




The employees are secured by the Danish Government (ldquoLoslashnmodtagernes Garantifondrdquo) and theemployees will typical be covered in case of bankruptcy















The employees are secured by the Danish Government (ldquoLoslashnmodtagernes Garantifondrdquo) and the

75

employees will typical be covered in case of bankruptcy







No


The administrator or the reconstructor submit a financial statement and a statement to the court and thecreditors The court convenes the administrator or the reconstructor and creditors to a meeting anddecides that the proceedings has now ended


See answer 53



No


No



None


The Minister of Justice may provide that decisions of foreign courts and authorities relating to

76

bankruptcy suspension of payments or other similar proceedings shall be binding and enforceable inDenmark

The Minister of Justice may specify the conditions under which a foreign states law will apply to thedetermination of the legal consequences of bankruptcy suspension of payments or other similarproceedings

However the Minister of Justice has never used his power to enact such rules and Denmark recognizestherefore not a foreign insolvency proceedings

For the Nordic countries except the Nordic Bankruptcy Convention

77

Estonia

Ants Mailend Partner Law Firm VARUL

wwwvarulcomen email antsmailendvarulcom tel +372 626 4300



Estonian law distinguishes between security over movables and real security It is also possible topledge rights

Estonian right of security over movables recognizes rights of security arising from a transaction or lawand right of security on seized assets Rights of security over movables are possessory pledgeregistered security over movables commercial pledge and maritime mortgage Right of security oflessor is an example of a right of security arising from law Right of security on seized assets is also aright arising from law it is created when a thing is delivered to a bailiff and it grants a claimant thesame rights as a pledge established under a contract or some other right of security that has arisen fromlaw

Out of rights of security over movables only possessory pledge is tied to the delivery of a thing to thepledgee Possessory pledge contracts must be concluded in writing if the value of the pledged objectexceeds 50 euros As regards other rights of security the pledged object remains in the possession of thepledgee and the right of security is registered in the respective register Only entrepreneurs entered inthe commercial register may establish a commercial pledge A commercial pledge may be establishedover entire movable property of a company Maritime mortgage is based on regular mortgage

The only real security is mortgage Mortgage does not presume the existence of a claim to be securedJudicial mortgage is an exception here - it is established to the extent of the claim of the action andsecures the claim to be satisfied by a court decision A debt can be secured with a mortgage establishedon an immovable of the owner or another person Mortgage secures also collateral claims relating to theprincipal claim In order to establish a mortgage a notarized agreement is required and a correspondingentry has to be made in the land register


Validity of a transaction can be challenged on general civil law bases In the event of a breach ofcontract also general private law legal remedies may be invoked

Another possibility to challenge a transaction is by way of recovery procedure Recovery is anexceptional possibility stipulated in the law which entails the reversal of otherwise valid transaction oractivity which is harmful to the creditors The possibility of recovery is stipulated in the Code ofEnforcement procedure and in the Bankruptcy Act

Pursuant to the Code of Enforcement Procedure an action must be filed against a debtor andcounterparty to recover a transaction that is damaging to the interests of the claimants In order torecover the claimant must have an enforcement instrument and the claim must have fallen due andmaking a claim for payment on the assets of a debtor has not brought about satisfaction of the claim of

78

the claimant in full or there is reason to presume that making the claim for payment does not result in thesatisfaction of the claim A transaction can be recovered if it is made by a debtor if it is made withinthree years before an action is filed if it was knowingly made to damage the interests of claimants andthe counterparty knew or should have known that the transaction damages the interests of claimantsExceptions apply to the recovery of a gratuitous contract division of joint property and provision ofsecurity

Recovery is possible also in bankruptcy proceedings If a debtor is declared bankrupt the bankruptcytrustee files an action to recover a transaction In recovery the court revokes pursuant to the BankruptcyAct transactions which were concluded or other acts which were performed by the debtor before thedeclaration of bankruptcy and which damage the interests of the creditors Transactions which can berecovered are ones which were made

(i) during the period from the appointment of an interim trustee until declaration of bankruptcy

(ii) within one year before the appointment of an interim trustee if the other party knew or should haveknown that the transaction damages the interests of the creditors

(iii) within one to three years before the appointment of an interim trustee and if the debtor intentionallydamaged the interests of the creditors by the transaction and the other party to the transaction knew orshould have known that the debtor damaged the interests of the creditors by the transaction

(iv) within five years before the appointment of an interim trustee if the debtor intentionally damagedthe interests of the creditors by the transaction and the other party to the transaction was a personconnected with the debtor and knew or should have known of the damage

Exceptions apply to the recovery of a gratuitous contract division of joint property performance of afinancial obligation and provision of security


A board member may face both civil and criminal liability

According to the general principle members of a management body are liable to the legal person andnot to its creditors Claim for compensation for damage on contractual basis may be filed by a companyCreditor of a public limited company may demand compensation for damage to the company if he cannotsatisfy his claims on the account of the companyacutes assets However in certain cases a board membermay be non-contractually liable directly to the creditors of the company

In assessing the applicability of contractual liability to a company the activities of a board member areweighed and it is assessed whether or not he has performed his obligations Board member is liableonly for damage resulting from non-performance or unsatisfactory performance of his obligations Forexample using companyacutes assets in its own interest making a transaction on behalf of the company in itsown interests using companyacutes assets or a loan against the interests of the company in its own or someother personacutes interests and unduly increasing the obligations of the company constitute a violation of anobligation Also taking or granting a big loan if it is evident that it is not possible to pay back orrecover the loan transferring assets below their market value careless choice of a party to a contractmaking a transaction on unusual terms and other economically unuseful behaviour are considered aviolation of an obligation

In order for a board member to be directly liable to the creditor the damage must have been caused tothe creditor by non-performing an obligation arising out of law Compensation for damage may be

79

demanded only if the aim of the obligation arising out of law was to prevent the occurrence of damage tothe creditors The law provides only a few of such legal grounds for filing a claim for damages one ofthose is for example obligation to file a bankruptcy petition and call a meeting of shareholders if netassets are not conforming to the requirements

A board member may be criminally liable for example if the board member concludes a contract withanother legal person for whom the transaction was useful and with whom the board member ispersonally connected by abusing trust Furthermore liability may arise in cases of intentionalviolations related to the organization of companyacutes activities if that causes the legal person majorproprietary damage

Failing to file a bankruptcy petition and causing insolvency are also criminally punishable

2 Taking action


In Estonia there are two proceedings aimed at solving financial difficulties of an undertakingbankruptcy proceedings which are regulated with the Bankruptcy Act that entered into force on 1 January2004 and reorganization proceedings which are regulated by the Reorganisation Act that entered intoforce on 26 December 2008


The debtor and the creditor are permitted to agree on settling their debts outside official bankruptcy orreorganization proceedings but there are no specific provisions for regulating such agreements Generallegal provisions regulating obligations which are contained mainly in the Law of Obligations Act andthe General Part of the Civil Code Act apply to agreements


More importance is attached to the protection of the debtoracutes interests in reorganization proceedings ofan undertaking than in bankruptcy proceedings due to the objectives of reorganization proceedingsBankruptcy proceedings proceed from the aim to satisfy creditorsacute claims and therefore the proceedingsare more focused on protecting creditors


In order to declare bankruptcy the debtor must be permanently insolvent Pursuant to the BankruptcyAct a debtor is insolvent if the debtor is unable to satisfy the claims of the creditors and such inabilitydue to the debtors financial situation is not temporary A debtor who is a legal person is insolvent alsoif the assets of the debtor are insufficient for covering the obligations thereof and due to the debtorsfinancial situation such insufficiency is not temporary

If a bankruptcy petition is filed by a debtor the court declares bankruptcy also if insolvency is likely tooccur in the future

Reorganization proceedings are commenced only if insolvency is likely to occur in the future TheReorganisation Act does not allow an insolvent undertaking to be reorganized Under the BankruptcyAct it is possible with a compromise to reorganize a company that has gone bankrupt

80


A bankruptcy petition may be filed by the debtor or a creditor In order to request the commencement ofbankruptcy proceedings the debtor has to file a bankruptcy petition with a court where the company hasits registered seat It is presumed that the seat indicated in the register one year before filing of abankruptcy petition is the seat of the debtor unless it is proved that the seat of the debtor is elsewhereThe bankruptcy petition of a creditor has to substantiate the debtors insolvency and prove the existenceof a claim The creditor has to substantiate the insolvency of the debtor by relying inter alia on at leastone of the following circumstances

the debtor has failed to perform an obligation within thirty days after the obligation has fallen due andthe creditor has cautioned the debtor in writing of the creditors intention to file a bankruptcy petition(bankruptcy caution) and the debtor has thereafter failed to perform the obligation within ten days it hasnot been possible within a period of three months to satisfy a claim in execution proceedings conductedwith respect to the debtor due to lack of assets or it has become evident in the execution proceedingsthat the assets of the debtor are insufficient for performing all the obligations thereof the debtor hasdestroyed hidden or squandered the debtors property or made grave errors in management as a result ofwhich the debtor has become insolvent or has intentionally caused the insolvency of the debtor in anyother manner the debtor has notified the creditor the court or the public of the inability of the debtor toperform the obligations thereof the debtor has left Estonia in order to evade performance of theobligations thereof or hides with the same purpose The petitioning creditor has to file proof of theamount and basis of and the term for satisfaction of the claim of the creditor

A debtor has to substantiate the insolvency thereof in the bankruptcy petition A debtor has tosubstantiate the insolvency thereof by annexing an explanation concerning the cause of the insolvencyand a list of the debts to the bankruptcy petition The list of the debts has to set out the names and seatsor residences of the creditors of the debtor the claims of the creditors and information concerning theassets of the debtor The debtor signs the explanation and the list of the debts

In order to commence reorganization proceedings a reorganization petition must be filed with a countycourt where the debtor has its seat An application for the reorganization of an undertaking has to besubmitted by the undertaking A reorganization application of an undertaking has to set out anexplanation of the undertaking regarding the reasons for the economic difficulties and has to substantiatethat the undertaking is likely to become insolvent in the future the enterprise requires reorganization thesustainable management of the enterprise is likely after the reorganization A financial statement for theprevious financial year an overview of the financial situation profit or loss and cash flows of thedebtor and a list of debts as at the date of submission of a reorganization application must be appendedto the reorganisation petition The list of debts must set out the name and details of the obligee and theamount of the principal claim and the collateral claim and information concerning the assets of theundertaking


A bankruptcy petition may be filed by the debtor or a creditor A reorganization petition may be filedonly by the undertaking


Both bankruptcy proceedings and reorganization proceedings are effected as judicial and extra-judicialproceedings

Courts exercise supervision over the lawfulness of bankruptcy proceedings and perform other dutiesprovided by law Courts decide on the commencement of proceedings appointment of an interim trustee

81

and declaration of bankruptcy also termination of bankruptcy proceedings (no matter what the basis fortermination) Courts settle all kinds of disputes particularly disputes related to defending claims butalso actions for recovering assets A court appoints and releases the trustee determines the remunerationand expenses of the trustee A court approves a compromise also the decision to terminate legalpersons In addition a court exercises general supervision over the activities of the trustee

A court has the right to be informed of the course of the proceedings and it may examine the trustees fileA court is obliged at its own initiative to take measures to ascertain the facts relevant to the bankruptcyproceedings and organize collection of the evidence necessary for the ascertaining of the facts

In reorganization proceedings the main role of the court is the commencement of reorganizationproceedings approving the reorganization plan and deciding on termination of the reorganizationproceedings A court also performs other activities provided by law for example deciding the amountof creditoracutes claim and existence of security in case of dispute

In reorganization proceedings the court also decides on commencement of reorganization proceedingsappointment of reorganization adviser approval or revocation of reorganization plan termination ofreorganization proceedings determines the amount of remuneration and expenses to be reimbursedreleases the reorganization adviser


The length of a bankruptcy proceeding depends on the complexity of the case and whether the partieschallenge court rulings made during the proceedings and how the process of defending claims goes As arule bankruptcy proceedings last a year or two However it is not unusual for complex bankruptcyproceedings involving court cases to last for more than two years

The time from commencing reorganization proceedings up to approving a reorganization plan may be amaximum of 171 days considering the terms in proceedings That time may be prolonged in the event thatthe commencement of reorganization proceedings or the approval of a reorganization plan is challengedalso in case there is a dispute over the amount of the claim or existence of security


The petitioning creditor has to file proof of the amount and basis of and the term for satisfaction of theclaim of the creditor In addition to the existence of a claim the bankruptcy petition of a creditor mustsubstantiate the debtors insolvency If the creditor wishes to file a bankruptcy petition on the groundsthat the debtor has failed to perform his obligation to the creditor the main way to substantiateinsolvency is showing that the debtor has failed to perform an obligation within thirty days after theobligation has fallen due and the creditor has cautioned the debtor in writing of the creditors intention tofile a bankruptcy petition (bankruptcy caution) and the debtor has thereafter failed to perform theobligation within ten days Although the law provides other grounds for substantiating insolvency(eg) they are exceptional in reality Thus as a general rule the creditor has to caution the debtorbefore filing a bankruptcy petition

A debtor has to substantiate the insolvency thereof by annexing an explanation concerning the cause ofthe insolvency and a list of the debts to the bankruptcy petition

In order to commence reorganization proceedings a financial statement for the previous financial yearan overview of the financial situation profit or loss and cash flows of the debtor and a list of debts as atthe date of submission of a reorganization application must be appended to the reorganization petitionThe reorganization petition has to provide explanations regarding the reasons for the economic

82

difficulties and substantiate the existence of conditions for commencing reorganization proceedings


Rights of the debtor are stipulated in the Bankruptcy Act For instance the debtor has a right to file abankruptcy petition object to the bankruptcy petition of the creditor participate in the preliminaryhearing appeal the bankruptcy decision receive information which means the debtoracutes right to examinethe trusteeacutes file and the court file of the bankruptcy case complain about the activities of the interimtrustee or trustee require the release of a trustee express an opinion regarding the trusteeacutesremuneration participate in court proceedings participate at the general meeting of creditors andchallenge the decision of general meeting file objections to the claims of creditors require thetermination of bankruptcy proceedings Debtoracutes rights are limited with respect to assets andmanagement

In reorganization proceedings the debtor has a right to file a reorganization petition express his opinionabout the appointment of a reorganization adviser and upon determining the remuneration of thereorganization adviser and expert appeal court rulings Unlike in bankruptcy proceedings inreorganization proceedings the debtor has a right to manage and dispose of his assets


In bankruptcy proceedings upon declaration of bankruptcy the right to manage and dispose of assetstransfers to the trustee In reorganization proceedings however the undertaking continues its economicactivities and retains control over its assets and the right to dispose of assets remains with themanagement of the undertaking or members of a body substituting it Reorganization adviser verifis thepurposefulness of the transactions of the undertaking during reorganization proceedings and if it appearsthat the undertaking is wasting its money or makes transactions that are damaging to the creditorsacuteinterest the court terminates reorganization proceedings


In relation to bankruptcy proceedings it is important to note that creditors are required to notify thetrustee of all their claims against the debtor which arose before the declaration of bankruptcy regardlessof the basis or the due dates for fulfilment of the claims no later than within two months as of the date ofpublication of the bankruptcy notice in the official publication Ametlikud Teadaanded (OfficialNotices) If a claim is filed after expiry of the aforementioned term with good reason the generalmeeting may restore the term for filing the claim at the request of the creditor If the term for filing aclaim is not restored the claim may be defended but in the case of acceptance the claim is satisfiedafter satisfaction of the accepted claims which were filed on time A claim cannot be filed after thedistribution proposal has been submitted to the court for approval If the creditor does not submit aclaim in bankruptcy proceedings his claim terminates This does not apply to claims secured by apledge Claims which are secured by a pledge may be submitted until a distribution proposal issubmitted to the court for approval If the owner of a claim secured by a pledge does not follow thisterm the term for filing a claim need not be restored

In relation to reorganization proceedings it is important to note relation to reorganization proceedingsthat a reorganization plan does not apply to creditors to whom the reorganization notice and the draft ofa reorganization plan for examination and for an opinion has not been delivered or who is otherwiseunaware of the reorganization proceedings A statement of claim may be filed on the basis of a claimwith respect to which reorganization proceedings do not apply also enforcement proceedings may becarried out with respect to such a claim


83

No

3 Creditor issues


In bankruptcy proceedings creditorsacute claims not secured by a pledge will be satisfied after the claims ofpledgees have been satisfied In reality their claims are usually either entirely unsatisfied or satisfied toa small extent

The interests of creditors whose claim is not secured by a pledge are better protected in reorganizationproceedings than in bankruptcy proceedings Creditorsacute claims are transformed ie they reduce theirclaims by certain extent extend the deadline for performance or allow the obligation to be performed ininstallments but in case the reorganization is successful their claims are still satisfied to a larger extentthan in bankruptcy proceedings The real problem is that reorganization is started too late which is whyit often changes into bankruptcy proceedings and the end result is the same for creditors whose claim isnot secured by a pledge ndash their claims are either entirely unsatisfied or are satisfied to a very smallextent


A pledged object is sold at a public auction or without an auction based on a precept of a generalmeeting of creditors or with the consent of the bankruptcy committee if the sale of assets in anothermanner is more profitable With the consent of the trustee a pledgee may sell the object of a securityover movables


If a creditor had the right to set off the claim thereof against the claim of the debtor before thedeclaration of bankruptcy the creditor may set off the defended claim also after the declaration ofbankruptcy

Set-off is not permitted if the debtor acquires a claim against the creditor after bankruptcy is declared(eg in case the economic activities of the debtor are carried on or if the debtor buys bankruptcy estate)

A claim acquired through assignment may be set off in bankruptcy proceedings only if the claim wasassigned and the debtor was notified of the assignment in writing no later than three months before thedeclaration of bankruptcy A claim against the debtor which is acquired through assignment may not beset off if the claim was assigned within the preceding three years before the appointment of an interimtrustee and the debtor was insolvent at the time of the assignment and the person who acquired the claimwas or should have been aware of the insolvency at the time of the assignment This restriction is aimedat preventing combinations through which the situation of creditors who do not have the option of set offis worsened by set off


No


No

84


The establishment of a bankruptcy committee is decided by a general meeting of creditors In case abankruptcy committee is established a general meeting of creditors decides the number of the membersof a bankruptcy committee and chooses its members If a general meeting of creditors decides not toestablish a bankruptcy committee the general meeting will fulfill its duties

The main duty of a bankruptcy committee is to exercise supervision over the activities of the trustee Itperforms also other tasks arising from law Mostly it involves granting different approvals Forexample a trustee may conclude transactions with special relevance to the bankruptcy proceedings onlywith the consent of the bankruptcy committee If a general meeting does not issue a precept to the trusteebut the trustee finds that sale of the bankruptcy estate without an auction would be more profitable theestate may be sold without an auction in a more profitable manner with the consent of the bankruptcycommittee A trustee may sell an enterprise or an organisationally independent part of an enterprise onlywith the consent of the bankruptcy committee Payments are made on the basis of the distribution ratiowith the consent of the bankruptcy committee

Bankruptcy committee may also be asked for an opinion For example the court determines theremuneration of a trustee having also heard the opinion of the bankruptcy committee



The trustee leads the debtor in bankruptcy proceedings and organizes continuation of the businessactivities of the debtor Trustee has the rights and duties of a board member Continuance of the debtor isdecided by the first general meeting of creditors In order to make transactions outside the regularbusiness activities of an undertaking the consent of the bankruptcy committee is required

In reorganization proceedings the debtor can manage and dispose of his assets himself but he mustcomply with the reorganization plan A reorganization adviser exercises supervision over theimplementation of the reorganisation plan A reorganization adviser submits at the end of every sixmonths to the creditors and the court a report which describes the economic position of the enterpriseimplementation of the reorganization plan and other relevant facts which the creditors may have interestin The court may impose supplementary obligations on a reorganization adviser upon exercise ofsupervision


In the event that it is decided that the economic activities of the debtor are continued it is presumed thatfunds will be obtained through these economic activities It is common that in order to continueeconomic activities of the debtor a loan is taken In such a case the obligation to return the loan isdeemed to be a consolidated obligation with respect to which payments are made before the claims ofcreditors are satisfied


Estonia does not have DIP funding However if a loan is taken in a debtoracutes bankruptcy proceedings theobligation to return the loan is deemed to be a consolidated obligation with respect to which paymentsare made before satisfying the claims of creditors A debtor may be required to perform a consolidatedobligation in bankruptcy proceedings on a general basis

85


An employee of the debtor also a former employee who has resigned within the preceding two yearsbefore the filing of the bankruptcy petition is required to provide the court the trustee and the bankruptcycommittee with information which they need in connection with the bankruptcy proceedings particularlyconcerning the assets including obligations and the business or professional activities of the debtor

If the economic activities of the debtor are continued the obligation to pay remuneration to employees isregarded as a consolidated obligation which must be performed before satisfying claims of creditorsPerformance of consolidated obligations may be required pursuant to the general procedure

Employer may cancel an employment contract extraordinarily upon declaration of bankruptcy ortermination of bankruptcy proceedings by abatement of bankruptcy proceedings without declaration ofbankruptcy

Upon insolvency of an employer the Estonian Unemployment Insurance Fund compensates to anemployee on the basis of an application submitted by the bankruptcy trustee or interim trusteeunreceived salary from the period before the declaration of the employer as insolvent (in the amountequal to up to the employees gross wages for the last three months of work but not exceeding in totalthe amount equal to three average gross monthly wages in Estonia) unreceived holiday pay from theperiod before the declaration of the employer as insolvent (in an amount to the extent of the employeesone gross monthly wage but not exceeding the amount equal to one average gross monthly wage inEstonia) and benefits from the period before or after the declaration of the employer as insolvent whichwere not received at the time of cancellation of the employment contract but which were prescribed bythe Employment Contracts Act (in the amount equal to up to the employees two gross monthly wagesbut in total not exceeding the amount equal to one average gross monthly wage in Estonia)


As a general rule a trustee has the right to perform an unperformed obligation arising from a contractentered into by the debtor and require the other party to perform the obligations thereof or abandonperformance of an obligation arising from a contract entered into by the debtor There are howeverexceptions to this rule For instance if a debtor has sold a movable with reservation of ownershipbefore declaration of bankruptcy and has transferred possession of the movable to the purchaser thepurchaser has the right to require performance of the sales contract In such case the trustee may notabandon performance of the debtors obligations arising from the sales contract The bankruptcy of alessor or a commercial lessor is not the basis for termination of the lease contract unless the contractprovides otherwise

It must be noted that in recovery the court may revoke transactions which were concluded or other actswhich were performed by the debtor before the declaration of bankruptcy and which damage theinterests of the creditors If a court revokes a transaction by way of recovery procedure the other partyis required to return the proceeds of the transaction to the bankruptcy estate together with the fruits andother gain If the other party to a recovered transaction has transferred something to the debtor on thebasis of the transaction it has to be returned to the party or if return is impossible the value of thatwhich was transferred has to be compensated for If the other party to a transaction knew or should haveknown at the time of entry into the transaction that the transaction damages the interests of othercreditors the other party may demand compensation for that which was transferred to the debtor only asa creditor in the bankruptcy proceedings

86



A trustee is notified of a claim by a written petition (proof of claim) The proof of claim must set out thecontent basis and amount of the claim and whether the claim is secured by a pledge Documents provingthe circumstances specified in the proof of claim shall be annexed thereto


Claims are to be filed no later than within two months as of the date of publication of the bankruptcynotice in the official publication Ametlikud Teadaanded A court immediately publishes a bankruptcynotice after declaration of bankruptcy A bankruptcy notice sets out the term for filing the claims and theconsequences of failure to file a claim within the specified term

The two-month term for filing claims is not absolute If a claim is filed after expiry of the two-monthterm with good reason the general meeting may restore the term for filing the claim at the request of thecreditor In such case the claim is deemed to be filed within specified term If a claim is not filed withinthe specified term and the term for filing a claim is not restored the claim may be defended but in thecase of acceptance the claim will be satisfied after satisfaction of the accepted claims which were filedon time

A claim cannot be filed after the distribution proposal has been submitted to the court for approval


Rankings of creditorsacute claims

(i) accepted claims secured by a pledge To the extent of the money received from the sale of thepledged object from which payments relating to the bankruptcy proceedings made before payment ofmoney on the basis of distribution ratios in proportion to the ratio of the amount of money received fromthe sale of the pledged object to the total amount of money received from the sale of the bankruptcyestate but no more than 15100 of the amount of money received from the sale of the pledged objecthave been deducted If a claim secured by a pledge is not satisfied in full out of the money received fromthe sale of the bankruptcy estate the rest of the claim is satisfied together with the claims of the nextranking

(ii) other accepted claims which were filed within the specified term

(iii) other claims which were not filed within the specified term but were accepted

Are there other complex issues arising by virtue of the insolvency for example an insolvency officerprescribed method for claims filing

No



There are no cram-down procedures stipulated in the Bankruptcy Act

87

In reorganization proceedings a court may approve a reorganization plan also when creditors are againstit If the reorganization plan complies with the law a court appoints two experts to analyze thereorganisation plan A court approves a reorganization plan which has not been accepted by creditors ifaccording to the experts the reorganization of the undertaking is likely to succeed on the basis of thereorganization plan no creditor is treated substantially less favourably as compared to other creditorsor as compared to other creditors belonging to the same group and in the case of an importantundertaking who is an important employer Although the ruling by which the reorganization plan hasbeen approved or the approval of the reorganization plan has been refused may be appealed it may stillbe said the foregoing constitutes essentially a cram-down procedure in reorganization proceedings


Bankruptcy proceedings terminate with the liquidation of the undertaking or by approval of acompromise The first general meeting of creditors decides whether bankruptcy proceedings are aimedat liquidating or rehabilitating the company Bankruptcy proceedings usually have a liquidating naturerehabilitation of an undertaking is very rare

At the end of the liquidating bankruptcy proceedings the bankruptcy trustee submits a final report to thecourt A final report sets out information concerning the bankruptcy estate and the money received fromthe sale thereof payments activities of the trustee accepted claims of creditors expenses and othercircumstances relevant to the bankruptcy proceedings Also a trustee has to set out in the final reportwhether insolvency was caused by an act with criminal elements a grave error in management or othercircumstances and whether the trustee has submitted a petition for the commencement of criminalproceedings A court approves the final report by a ruling A company is liquidated by the trustee Acompany terminates as of its deletion from the commercial register

In rehabilitating bankruptcy proceedings a compromise is made at a general meeting of creditorsconcerning all claims against the debtor A trustee immediately submits a compromise decision to thecourt for approval The court decides on the approval of the compromise by a ruling A court rulingapproving a compromise terminates the bankruptcy proceedings On the basis of the ruling the debtorrecovers the right to administer his or her assets and the sale of the assets will be terminated Moneyreceived from the sale its of the assets which has not been transferred to creditors will be transferred tothe debtor

Reorganization proceedings terminate upon expiry of the term for implementation of the reorganizationplan or implementation of the reorganization plan before the due date A court may terminatereorganization proceedings prematurely on grounds stipulated in law also revoke the reorganizationplan


There is no official statistics about the effectiveness of bankruptcy proceedings The most informativeresearch about the effectiveness of bankruptcy proceedings has been carried out in 2004

Approximately 73 of the bankruptcy proceedings of undertakings declared insolvent in 2004 weresuch where creditors received nothing

The average percentage of payments in proceedings where a distribution proposal was approved wasabout 18 Still most of the payments were payments made to pledgees ndash about 89 of the securedclaims were satisfied Payments to creditors of the main ie second ranking were made in average tothe extent of 4 of the claims they defended

88

Although the data of the research is outdated there is no reason to believe that the indicators ofefficiency of bankruptcy proceedings have changed significantly in the meantime Pledgees have a goodposition in bankruptcy proceedings but payments made to creditors in the second rank are very smallcompared to the claims they defended



No Bankruptcy proceedings and reorganization proceedings are both formal proceedings A companyhowever has the possibility to negotiate privately with the creditors


No





If the center of the main interests of a company (COMI) within the meaning of recitals 12 and 13 of thepreamble to Regulation 13462000 is in a EU member state (except Denmark) the insolvencyproceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

Secondary insolvency proceedings commenced by a court of another member state are recognized incase Estonian company has its establishment in that state within the meaning of Article 2(h) of theRegulation 13462000

If a decision on declaration of bankruptcy with respect to an Estonian company is made in Denmark orsome other country that is not a member of the EU the decision will be recognized pursuant to theEstonian Code of Civil Procedure As a rule a foreign court decision will be recognized in Estoniaexcept in some cases provided by law A court decision will not be recognized if doing so would bemanifestly contrary to important principles of Estonian law (public policy) particularly to fundamentalrights and freedoms of a person also if the debtor was unable to reasonably protect its rights or if thedecision is irreconcilable with a decision given in a dispute between the same parties in the same matterin Estonia or a recognized decision or a foreign decision that is recognized in Estonia

89

Finland

Ville Ahtola Counsel Castreacuten amp Snellman Attorneys Ltd

wwwcastrenfi email villeahtolacastrenfi tel +358 (0)20 7765 447



The most common types of security that can be taken over assets are mortgages floating charges andpledges

Mortgages can be taken over immovable property and some forms of movable property includingcertain motor vehicles aircrafts and ships

A floating charge is a specific type of mortgage where a companyrsquos fluctuating assets such as its tradingstock are pledged as security for a specified claim As control of the assets is not transferred to thecreditor the debtor is free to dispose of them without obtaining the creditorrsquos consent The creditorreceives one or more mortgage bonds as proof of its security interest over the debtorrsquos assets If thedebtor defaults the creditor has the right to receive preferential payment from the sale proceeds of theassets subject to the floating charge (when these assets are sold either within the insolvency proceedingsor as part of a sale of the business)

A pledge can be given by the debtor or a third party able to transfer title over almost any definableproperty which acts as security for a specified claim If the debt is not discharged when due thecreditor has the right to receive preferential payment from the sale proceeds of the pledged property


According to the Act on the Recovery to the Bankruptcy Estate (7581991) a transaction concludedprior to the commencement of the bankruptcy proceedings may be recovered to the bankruptcy estateRegardless of the name of the Act in addition to bankruptcy proceedings the Recovery Act is applied torestructuring proceedings Since the purpose of the Act is to ensure equality among creditors and preventthe debtor of privileging one of the creditors at the expense of the others any kind of proceedingsarrangements or measures taken may be recovered if the conditions set out in the Recovery Act are met


The Finnish Companies Act (6242006) does not set any obligation for the board of directors to file forbankruptcy or restructuring of the company even in situations where the company is excessively indebtedor insolvent The company may continue its business operations but the board of directors has to bediligent in order to avoid criminal liability andor liability for damages

The directors and the managing director are personally liable to the company a shareholder or a thirdparty where damage or loss has resulted from a breach of the provisions of the Companies Act or thecompanyrsquos articles of association

There are also certain provisions in the Criminal Code regarding offences by a debtor such as

90

dishonesty by a debtor and favouring a creditor

2 Taking action


The formal insolvency procedures available in Finland for companies are bankruptcy and restructuring

Bankruptcy is an insolvency procedure that covers all the liabilities of the debtor where the assets ofthe debtor are used in payment of the claims in bankruptcy In order to achieve the objective ofbankruptcy the assets of the debtor shall in the beginning of bankruptcy become subject to the authorityof the creditors An estate administrator appointed by the court shall see to the management andliquidation of the assets of the debtor and to the other administration of the bankruptcy estate

Restructuring of Enterprises is an insolvency procedure the purpose of which is to rehabilitate adistressed debtorrsquos viable business to ensure its continued viability and to achieve debt arrangementsIn the proceedings a court will approve a restructuring programme which includes measures on theactivities assets and liabilities of the debtor

The scope of this report only covers restructuring proceedings not bankruptcy proceedings


Voluntary restructuring The aim of voluntary restructuring is generally the same as that of formalrestructuring proceedings Voluntary restructuring involves arrangements made between a company andits creditors with the goal of avoiding bankruptcy It can be used for the same purposes as formalrestructuring ie not only to reorganize a companyrsquos debts but also its business branches capitalstructure and etc Voluntary restructuring only works if the creditors have sufficient confidence in thecompanyrsquos viability


Voluntary restructuring is usually considered as a creditor-friendly procedure since the creditors havemore power in a voluntary restructuring in comparison to formal restructuring

The formal restructuring procedure is extensively regulated which makes it more debtor-friendly Thegoal of the procedure is to rehabilitate a distressed debtorrsquos viable business or to ensure its continuedviability and to achieve debt arrangements In formal restructuring it is also possible to cut the debtcapital which naturally improves the debtorrsquos standing


A debtor is considered to be insolvent when it is otherwise than temporarily unable to repay his or herdebts as they fall due The inability to pay ones debts must be more than temporary

The prerequisites for restructuring are that at least two creditors whose total claims represent at leastone fifth of the debtorrsquos known debts file a joint application with the debtor or declare that they supportthe debtorrsquos application or the debtor faces imminent insolvency or the debtor is insolvent

However the debtor is not eligible for restructuring if the debtor is insolvent and it is probable that therestructuring programme will not remedy the insolvency or prevent its recurrence it is probable that the

91

debtorrsquos assets are not sufficient to cover the costs of the restructuring proceedings and no one else hasundertaken to cover these costs it is probable that the debtor will not be able to repay debts arising afterthe commencement of the proceedings In addition the procedure may not be commenced if there isjustifiable reason to believe that the primary purpose of the application is to prevent a creditor fromcollecting on his or her claim or there is justifiable reason to believe that the necessary conditions forthe preparation or approval of a restructuring programme for the debtor do not exist or the debtorrsquosbooks are materially incomplete or erroneous


A restructuring matter shall be filed with a petition Only courts specifically referred to in theRestructuring of Enterprises Act have jurisdiction over restructuring matters

When the petitioner is the debtor a statement on the creditors the debts and their collateral as well ason the state of its finances shall be appended to the application If the debtor has not filed the applicationtogether with the creditors and the creditors have not supported the application the debtor shall providea statement on the main reasons for its financial difficulties the prospects for the continuation of itsactivities the funds needed to cover the costs of the restructuring proceedings and the means by whichthe debtor is to repay its debts other than restructuring debts


The application for restructuring procedure may be filed by the debtor a creditor or several creditorstogether The debtor and the creditors may also file a joint application


The court shall appoint an administrator who shall be nominated by either the debtor or the creditor

The court issues the order on the commencement of restructuring proceedings In addition it shallappoint a committee of creditors set a date by which the creditors must declare their claims in writingto the administrator if these claims differ from those reported by the debtor set a date by which theadministrator must serve the report on the financial situation of the debtor on the parties to the matter seta date by which the draft restructuring programme is to be prepared

The court shall give an order either on the approval of the restructuring programme or on the terminationof the proceedings without approval of the restructuring programme


The proceedings usually take about 8-12 months but expedited proceedings can be carried throughrather rapidly ie few months Implementing the restructuring plan may take approximately three to tenyears


The court order on the commencement or termination of the restructuring proceedings on an interiminterdiction or on restrictions on the competency of the debtor shall be publicly announced and notifiedto certain authorities as well as entered into the trade register as well as in various property registersand the register of mortgages


In comparison to bankruptcy procedure in which the debtor loses control of the assets to the creditors

92

in restructuring the debtor remains in control of the business throughout the procedure However thedebtor may need permission from the administrator to conduct certain transactions The debtor will beable to continue business activities normally regardless of the restructuring proceedings The debtorrsquosliquidity also increases as funds still come in to the business but the creditors are not allowed to collectthe debts during the planning stage of restructuring


In Finland the debtor in possession principle is applied during restructuring proceedings The debtorrsquosauthority to conduct transactions is limited to some extent due to the fact that the debtor may need theadministratorrsquos approval for certain transactions


There are no means provided in the restructuring legislation to replace the management of a companyagainst the companyrsquos ownerrsquos wishes However the creditorsrsquo view must be taken into account as theyare the ones whose acceptance is needed for the restructuring programme Therefore in practice thecreditors can have an influence in replacing the management

It is noteworthy that all types of businesses are not easily restructured Larger businesses are easier torestructure and for instance holding companies would be very difficult to restructure without forinstance simultaneously restructuring a group of company with the business operations

When evaluating the survival of companies which have gone through restructuring proceedings in a fiveyear time scale approximately half have in reality proved to be unfit for the restructuring proceedings


There are no political factors which may come into play in a restructuring procedure

3 Creditor issues


Once the proceedings have commenced the debtor shall not repay restructuring debts or providesecurity for such debts However a payment may be made on the decision of the administrator tocreditors who have small claims if this is appropriate from the point of view of the proceedings

The debts that arise after the filing of the application must be paid as they fall due


The commencement of restructuring proceedings triggers an interdiction of debt collection and thisinterdiction also affects to real security rights The interdiction of debt collection means that nomeasures shall be directed at the debtor in order to collect a restructuring debt As regards real securityrights also the exercise of rights of liquidation or recovery based on real security rights and otherutilization of security in order to obtain payment falls within the sphere of this interdiction

The debt arrangement shall not affect the existence or content of a creditorrsquos real security rightNonetheless in the debt arrangement the security arrangements relating to the debt may be altered byreplacing the security with other fully adequate security The status of secured debts is safeguarded so

93

that with regard to secured debts a reduction in the balance of the unpaid debt is prohibited With regardto secured debt it is also prohibited to incorporate the full or partial refinancing of the debt withsubstitute performance that is reasonable in view of the creditorrsquos field of activities and status

Furthermore payments on a secured debt shall be set so that at least the present value of the secureddebt will be repaid within a reasonable period not to materially exceed the remainder of the creditperiod without the consent of the creditor or if the debt has become due in full not to materially exceedone half of the original credit period


According to the Restructuring Act during the restructuring proceedings a creditor shall have the rightto set a claim off against a debt owed to the debtor at the commencement of the proceedings under thesame conditions as in bankruptcy proceedings The set-off notice shall also be served on theadministrator

The Act further provides that if a debt owed by a creditor other than a secured creditor becomes due ona fixed date after the date when the interdiction of debt collection takes effect the creditor shall have theright to withhold payment to an amount corresponding to the claim from the debtor so that the debtrelationship otherwise continues otherwise with the same terms until the set-off is effected or theinterdiction of debt collection ends

Furthermore for a credit institution it is prohibited to set-off funds that the debtor has on deposit at theinstitution when the interdiction of debt collection takes effect or thereafter or funds that are at the creditinstitution at that time for transfer into the debtorrsquos account where the account is used for payments


The intra-group debts are in the comparable position with other debts Provisions concerning thecreditor recourse are the same with regard to company affiliates


On the request of the applicant the administrator or a creditor the court shall appoint a committee ofcreditors as the joint representative of the creditors unless this is to be deemed unnecessary owing tothe small number of creditors or some other reason The committee of creditors shall have at least threemembers The composition of the committee of creditors shall be determined so that various groups ofcreditors such as secured creditors and creditors whose claims have a similar basis are equallyrepresented

The duties of the committee of creditors as an advisory body are to assist the administrator in theperformance of his or her duties and to monitor the activities of the administrator on the behalf of thecreditors In order to perform their duties the committee of creditors and its members are entitled asnecessary to obtain information from the administrator concerning the debtorrsquos books businesscorrespondence and other business documents and data files



Once the proceedings have commenced the court shall appoint an administrator who shall supervise the

94

day-to-day activities and interests of the creditors During the restructuring procedure the officers of thedebtor remain in control of and continue to operate the business in the usual way but under thesupervision of the administrator who assesses the debtorrsquos financial situation and safeguards theinterests of creditors


With regard to liquid assets cash cash receivables outstanding loans and accounts receivables forinstance are considered as such assets Restructuring proceedings shall not be commenced if it isprobable that the debtorrsquos assets are not sufficient to cover the costs of the restructuring proceedings andno one else has undertaken to cover these costs Since the law does not provide that the expenses arecovered immediately but in the long term the assets of the debtor do not necessarily need to be in cashor other liquid assets Thereby some of the expenses may be covered for instance with future cash flowfinancing


On the application of the administrator the court may order that debt taken during the proceedings andspecified in the order has the same or a higher priority than a restructuring debt in respect of property ofthe debtor that stands as collateral for both debts It shall be a precondition for this that the arrangementis necessary to secure financing during the proceedings and that it does not significantly increase the riskof those creditors whose priority position would be weakened Such an arrangement shall not affect theposition of said creditors as secured creditors


When restructuring proceedings begin a shorter notice period than in normal cases is applied toemployment agreements The termination of employment agreements in case of restructuring is governedby the Finnish Employment Contracts Act (552001)

Firstly according to Employment Contracts Act if the employer is subject to a restructuring procedurethe employer shall be entitled to terminate the employment contract regardless of its duration at a noticeof two months if the termination derives from an arrangement or measure to be carried out during therestructuring procedure which is necessary to avoid bankruptcy and which causes the work to cease ordecrease However the employer shall not have the right to terminate the employment contract if theemployer can offer the employee work that is equivalent to that defined in the employment contract orwork equivalent to the employeersquos training professional skill or experience

Secondly the employer shall be entitled to terminate the employment contract regardless of its durationat a notice of two months if the termination derives from a procedure in accordance with a confirmedrestructuring plan that causes the work to cease or decrease or if the termination derives from anarrangement in accordance with the plan which is attributed to financial grounds established in theconfirmed restructuring plan and calls for a reduction in personnel resources

The employee shall observe a notice period of 14 days in connection with restructuring proceduresHowever during a lay-off employees are entitled to terminate their employment contract without noticeregardless of its duration If the date when the lay-off ends is known by the employee this right shall notapply for seven days preceding the end of the lay-off period


Generally speaking the commencement of restructuring proceedings shall have no effect on the existingundertakings of the debtor The initiation of the restructuring procedure under the Restructuring of

95

Enterprises Act also has no effect of terminating contracts with the debtor either and during therestructuring procedure the debtors business activities continue in the normal way However the debtorhas a right to terminate a lease or a credit-lease agreement where the debtor is the lessee to come to anend two months after the notice of the termination The procedure also includes a suspension of interestaccruing on overdue amounts to creditors


When the court issues the order on the commencement of the restructuring proceedings it will set a dateby which the creditors must declare their claims in writing to the administrator if the claims differ fromthose reported by the debtor The notifications are collected by the administrator Normally thesenotifications are to be collected within two months from commencement of insolvency proceedings

The court reserves the parties an opportunity to declare in writing to the administrator their objections toclaims

A restructuring debt that has not been declared by the debtor or by the creditor and which has otherwisenot come to the attention of the administrator before the approval of the restructuring programme shalllapse on the approval of the restructuring programme unless otherwise provided in the programmeHowever the debt shall not lapse if the creditor did not know and ought not to have known of it and ithad not come to the attention of the administrator before the approval of the programme


In restructuring proceedings the debts rank as follows (Act on the Ranking of Claims (19921578))

1 Claims secured by a lien or collateral right of retention or a legally registered encumbrance on thecompanyrsquos property

2 Claims based on costs incurred during corporate restructuring proceedings

3 Claims secured by floating charge (business mortgages up to 50 of the value of the assets subject toa floating charge)

4 Unsecured claims

Claims involving interests accrued after insolvency proceedings have commenced capital loans giftsand certain fines as well as shareholders receive payment based on their ownership in the company onlyif any assets remain after all other creditors have been paid in full


In practice obscurities in bookkeeping for instance may result in trouble with regard to theadministratorrsquos tasks in restructuring proceedings especially when settling the creditorsrsquo claims



96

A similar loan modification to the cram-down procedure also exists in the Finnish insolvency system Itis provided in Section 44 on methods of debt arrangement of the Restructuring Act It providesfollowing methods to arrange the debts

i A change of the payment schedule of a debt

ii An order that payments made by the debtor shall first be considered as payments against the balanceof the debt and only later as payments against credit costs

iii A reduction in the obligation to pay credit costs relating to the remaining credit period

iv A reduction in the balance of the unpaid debt

However the reduction in the balance of the unpaid debt and substitute performance as debtarrangements may not be applied to a secured debt


The possible debt arrangements are presented in the restructuring programme The administrator shallprepare a draft restructuring programme and submit it to the court

The court shall approve the draft restructuring programme if the conditions set to the approval are metThe restructuring programme may be approved if all of the known creditors or a majority in each of thegroups of creditors accepts the same Even if the programme is not approved by the majority of thedebtors in each group the restructuring programme may nonetheless be approved at the request of theperson who had prepared the draft the administrator or the debtor on certain conditions


Unless the program is approved by all of the known creditors the person presenting the draft shall alsopropose how the creditors are to be divided into groups which shall be as follows

i secured creditors

ii creditors holding a floating charge as security for their claims

iii others than secured creditors so that one group is formed by creditors whose claims may beenforced without a judgment or court order as provided in the Act on the Collection of Taxes and PublicCharges by Enforcement (3671961 laki verojen ja maksujen perimisestauml ulosottotoimin)

iv creditors with lowest-priority claims in accordance with section 6 of the Act on the Ranking ofClaims so that the groups are formed in accordance with the priority order of such claims



As mentioned above voluntary restructuring based on voluntariness is a possibility in Finland


Yes the Office of Bankruptcy Ombudsman has given guidelines regarding the accelerated restructuring

97

procedure



The Council Regulation (EC) No 13462000 on Insolvency Proceedings


According to the article 3 of the EC Regulation No 13462000 the courts of the Member State within theterritory of which the centre of a debtorrsquos main interests is situated shall have jurisdiction to openinsolvency proceedings The law applicable to insolvency proceedings and their effects shall be that ofthe Member State within the territory of which such proceedings are opened

Any judgment opening insolvency proceedings handed down by a court of a Member State which hasjurisdiction pursuant to Article 3 shall be recognized in all the other Member States from the time that itbecomes effective in the State of the opening of proceedings The judgment opening the proceedingsshall in general with no further formalities produce the same effects in any other Member State asunder this law of the State of the opening of proceedings

98

France

Remi Turcon Partner Alister Avocats

wwwalister-avocatscom email remiturconalisternet tel (33+1) 70 92


How might a creditor take over security assets

Typically the creditor will take security by way of either (i) a retention of title provision or (ii) a chargeover the debtorrsquos assets

The charge over the debtorrsquos assets may include

(i) A pledge against the business assets as an ongoing concern (French concept of ldquofonds decommercerdquo)

(ii) A pledge against one specific asset (tool machinery etchellipexcluding inventory)

(iii) A mortgage against a real estate asset


Any transactions including securities granted to a creditor entered into by a company in difficulty duringthe so-called ldquosuspicious periodrdquo (ldquopeacuteriode suspecterdquo) are automatically null and void or could bevoided

The suspicious period starts from the date of suspension of payments fixed by the judge on a case-by-case basis in the judgment until the date of the judgment


Directors have a duty to act in the interest of the company and creditors when a company is facinginsolvency or is insolvent Their personal civil liability may only be engaged in case of grossnegligence their personal criminal liability may also be engaged in case of fraud and fraudulentbankruptcy

2 Taking action


The Court must be satisfied that the company is in a state of suspension of payments (ldquosuspension despaiementsrdquo) this is generally the case when the company is unable to pay its debts with its existingassets

What informal procedures are available to the company

99

The main procedures available to the company are

(i) Safeguard procedure (ldquoprocegravedure de sauvegarderdquo)

The safeguard procedure is available when the company is not in a state of suspension of payments butis in a state of insurmountable difficulty

(ii) Receivership procedure (ldquoprocegravedure de redressement judiciairerdquo)

The receivership procedure is available when the company is in a state of suspension of payments thisprocedure allows the company to continue its business activities retain employees and clear its debts aplan is ordered by judgment after an observation period

(iii) Liquidation procedure (ldquoprocegravedure de liquidation judiciairerdquo)

When a debtor is in a state of suspension of payments without any alternative solutions a liquidationprocedure may be started against the debtor


The safeguard and receivership procedures are debtor-friendly


The state of suspension of payments is the trigger for the receivership procedure


An application for any of the above procedures needs to be filed with the President of the CommercialCourt where the company is registered


Any legal representative of a company may place the company in any of the three above-mentionedinsolvency proceedings

Any creditor of a company the Attorney-Generalrsquos office or the Court itself may also place the companyin receivership or liquidation procedures

What is the extent of Court involvement

The Court rules on the opening of the safeguard procedure and approves any safeguard plan which maybe agreed by and between the company and the creditors

The Court rules on the opening of the receivership procedure determines the suspension of paymentsdate appoints all bodies of the procedure (receiver creditorsrsquo representative supervisory judge)oversees the entire receivership procedure approves the continuation plan and any shares or assetssales decides on the end of the receivership procedure or the transformation into a liquidationprocedure

The Court rules on the opening of the liquidation procedure determines the suspension of payments dateappoints all bodies of the procedure (liquidator creditorsrsquo representative) oversees the liquidationprocedure and rules on the liquidation of the company


100

The observation period in the context of a safeguard or receivership procedure is generally 6 monthsmaximum but in exceptional circumstances can be renewed for 6 months maximum


Safeguard receivership and liquidation judgments are automatically published in the BODACC officiallegal announcement journal


The receivers as well as the supervisory judge (as applicable) have the right to require the continuationof any ongoing contract at the time of the judgment regardless of any provision to the contrary that mayhave been inserted in the contract

The payment of all debts borne prior to the date of the judgment opening as insolvency proceeding issuspended


As already stated the receiver as well as the supervisory judge (as applicable) have the right to requirethe continuation of any ongoing contract at the time of the judgment regardless of any provision to thecontrary that may have been inserted in the contract This rule is a rule of public policy in France


There are in theory no political factors which may come into play

3 Creditor issues


Debts are paid in the following order

(i) debts borne following the date of the opening judgment

(ii) ldquosuper privilegedrdquo creditors including

a employees

b legal fees and costs incurred after the date of the opening judgment necessary for the unfolding of thebankruptcy proceeding

c French State and French social security bodies

(iii) secured creditors

(iv) all other unsecured creditors are treated on an equal basis


A secured creditor might enforce its security in line with the above information

101

A secured creditor holding a security interest in a specific asset will prevail against

a secured creditor holding a security in the general business assets as an

ongoing concern

Are there prevailing intercompany debt issues

Intercompany debt is treated in the same way as an unsecured creditor


Creditor recourse is not available in respect of any company affiliates unless the bankruptcy proceedingis extended to the affiliate company


All creditors are represented by the creditorsrsquo representative appointed by the Court



The company is managed by the existing companyrsquos directorsmanagerpresident (as the case may be) ina safeguard or receivership procedure However they may need the receiverrsquos or the supervisoryjudgersquos consent to enter into some management decisions

The company is managed by a Court-appointed liquidator in a liquidation procedure


The company is usually financed by the revenues generated by the company and by the proceeds of thesale of any of the companyrsquos assets


Employees are usually represented by their own representatives who are elected at the beginning of thebankruptcy proceeding







102





Are there other complex issues arising by virtue of the insolvency for example an insolvency officerprescribing methods for claims filing











Are there other complex issues arising by virtue of the insolvency for example an insolvency officer prescribing methods forclaims filing




The Court issues a judgment to formally conclude the bankruptcy proceeding

103


Creditors will be paid in the order laid out above and according to the financial resources available tothe company Since unsecured creditors are treated on an equal basis they will be paid their debt prorata provided of course enough cash is available



No other non-formal procedure is available


No other accelerated process is available



European bankruptcy proceedings may be available


Bankruptcy judgments of foreign companies from other European Courts are automatically recognised inFrance

Bankruptcy judgments of foreign companies from non-European Courts must be recognized by a FrenchCourt (ldquoexequaturrdquo procedure)

104

Germany

Dr Timo Alte Partner Christian Aufdermauer Associate Haver amp Mailaumlnder Rechtsanwaumllte

wwwhaver-mailaenderde email tahaver-mailaenderde tel +49 (0) 711 22744-14



A creditor may secure his receivables vis-agrave-vis the debtor by mortgaging or pledging the debtorrsquosassets by pledging the debtorrsquos receivables or by agreement on reservation of title concerning the goodsdelivered to debtor

If the transaction between the creditor and the debtor has already been made when the financialdifficulties of the debtor occurred the creditor may ask the debtor to grant securities for its alreadyexisting receivables However any securities granted by the debtor during a certain time-period(generally up to three months) before the filing for insolvency might be challenged by the insolvencyadministrator later on


Transactions entered into by the debtor within a certain time-period before the filing for insolvency arevulnerable to challenges by the insolvency administrator The time-period varies from 1 month up toseveral years depending on the motive and the participants of the transaction


A director might be liable to creditors when he did not file for insolvency without undue delay withinthree weeks after the company became bankrupt at the latest A director might furthermore be liable tothe company if he performed transactions after the company has become bankrupt or if he was trading inabsence of proper consideration A director might as well be liable if he undertakes payments toshareholders while in distress thus causing bankruptcy

In addition there is always a risk of criminal liability if the director fails to properly and timely file forinsolvency or undertakes to disadvantage of creditors

2 Taking action


Companies may be subject to regular insolvency proceedings The companyrsquos right to manage andtransfer the insolvency estate is being vested in the insolvency administrator The company will eitherbe continued or liquidated in favour of the creditors

Companies may as well be subject to personal management proceedings Thus the company maymanage and dispose of the assets involved in insolvency proceedings itself under the supervision of a

105

custodian Nevertheless the objectives of such proceedings remain for the satisfaction of the creditors

Furthermore a companyrsquos insolvency may be settled in an insolvency plan The regulations of theinsolvency plan principally substitute the statutory regulations of the German Insolvency Act Theestablishment of an insolvency plan should nevertheless be regarded as a formal procedure whichrequires the approval of the creditorsrsquo assembly


Informal procedures do not exist A debtor could always reach arrangements with its creditors to sort itsdebts However no private arrangement may ever prevent any creditor from filing for insolvency or toexecute binding rulings against the debtor


In principal any insolvency proceedings are creditor-friendly because the purpose of such proceedingsis the collective satisfaction of the debtors creditors However there are possibilities for self-management and establishment of an insolvency plan In these cases the debtor has some more influencethan in ldquousualrdquo insolvency proceedings


General trigger for insolvency is illiquidity what is the case if the debtor is unable to meet his matureobligations to pay

If the debtor filed for insolvency imminent illiquidity suffices as a reason to commence insolvencyproceedings

Overindebtedness may trigger insolvency for corporations what is principally the case if the debtorsassets no longer cover his existing obligations to pay and going concern is not likely


Insolvency proceedings require a written request Such request may be filed by the creditors or by thedebtor itself

A creditors request is admissible if the creditor has a legal interest in the commencement of theinsolvency proceedings what is the case if he shows his claim and the reason why insolvencyproceedings should be commenced to the satisfaction of the court

A debtor has to add a list containing at least all known creditors and their respective receivablesAdditional information regarding for example social securities and pensions of the employees ought tobe added If a debtor wishes to apply for self-management proceedings this has to be indicated in thefiling




The most important decision by the court is the appointment of the insolvency administrator In additionthe court decides on commencement of the insolvency proceedings and has to be involved in critical

106

decisions such as the confirmation of an insolvency plan or the termination of the insolvencyproceedings Most responsibility lies with the insolvency administrator who has to manage the insolventcompany and to liquidate its assets


There is no given time frame It is not unlikely for insolvency proceedings of companies to take up to 3to 4 years or even longer depending on the size of the insolvent company the numbers of creditors andthe possibilities to find an investor for the insolvent company





Upon the commencement of the insolvency proceedings the debtors right to manage and transfer theinsolvency estate will be vested in the insolvency administrator However during insolvency creditorsprincipally may not execute into the insolvency estate or into the debtors other property


A standard personal management process pursuant to German insolvency law will obviously notresemble the debtor in possession process as the debtor remains obliged to do his very best to satisfythe creditors even by liquidating the company However a new law has been introduced in Germanyallowing a debtor personal management and protection for up to three months in order to prepare aninsolvency plan restructuring the distressed company Probably this process might resemble the debtorin possession process to some extent but even in this case he is supervised by a custodian appointed bythe court


No


In the past there have been efforts by the government to assist distressed companies in order tosafeguard jobs This attitude has changed recently

3 Creditor issues



107


The enforcement depends on the kind of security

Under a right in rem or in personam the creditor is entitled to claim the separation of the respectiveobject from the insolvency estate

Creditors holding contractual pledges a pledge acquired by attachment a resembling security or a legallien in an asset forming part of the insolvency estate are entitled to separate satisfaction The asset willbe liquidated by the insolvency administrator and the creditor will be satisfied according to his securityHowever the creditor has to bear the costs of the liquidation of the asset what will sum up to 9 of theprofit gained by liquidation of the respective asset




Principally inter-company debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholder loans are subordinated by law In addition any repayments ofshareholder loans within one year before filing for insolvency can be challenged by the insolvencyadministrator and therefore have to be paid back by the shareholders It is important to know that theseprovisions do not only apply to ldquorealrdquo shareholder loans but also to any claims of shareholders whichcould be qualified as loans from an economic perspective For example deferred claims for paymentresulting from supply of products could also be qualified as loan with the abovementionedconsequences


Missing any contractual agreements creditors cannot take recourse in respect of any companiesaffiliated with the debtor However creditors can take recourse from any personal liable shareholder ofthe debtor


A creditor committee will be established in larger cases The creditor committee might for exampleelect a different insolvency administrator The creditor committee may decide upon the debtorrsquos right ofself-management and in self-management proceedings the creditor committee has to approve criticaltransactions



In regular insolvency proceedings the company is being controlled by the insolvency administrator

In self-management proceedings the company is being controlled by the debtor being under thesupervision of the creditorsrsquo committee and the custodian

108


The company is financed by the insolvency estate and by receivables collected by the insolvencyadministrator The insolvency administrator might in addition continue transactions to earn money for thecompany or ask individual creditors for granting preferred loans


There is principally no possibility to arrange DIP funding However receivables deriving fromtransactions entered into by the insolvency administrator or the self-managing debtor rank among otherdebts and have to be fully satisfied As a new creditor could expect full satisfaction of his receivableshe could be ready to fund the bankrupt company Nevertheless this procedure is not similar to DIPfunding


The employment contract remains in effect however with special termination conditions ie noticeperiods of 3 months With regard to the wages payable for the last three months before thecommencement of the insolvency proceeding the Employment Agency is obliged to pay any outstandingwages As far as the time period after commencement of the insolvency proceedings is concerned theemployeesrsquo wages have to be paid out of the insolvency estate



If the contract has not or has not completely been performed by the debtor and its other party at the datewhen the insolvency proceedings were commenced the insolvency administrator may at his discretionrequest performance or termination If the insolvency administrator requests performance the other partyis entitled to consideration without limitations



The insolvency creditors must file their claims in writing with the insolvency administrator Such filingshall be accompanied by copies of the documents evidencing the claim Usually the insolvencyadministrators provide standard forms for the filing


In the order commencing the insolvency proceedings the creditors will be required to file their claimswith the insolvency administrator within a definite period of time However claims filed after expiry ofthe filing period will not be excluded from the proceedings The creditor will only have to bear the extracosts if any arising from the late filing


Principally all claims rank equal Some claims will be satisfied ranking below the other claims of

109

insolvency creditors such as interests and penalties for late payment accruing the costs incurred byindividual insolvency creditors due to their participation in the proceedings fines regulatory finescoercive fines and administrative fines claims to the debtors gratuitous performance of considerationas well as claims for repayment of shareholdersrsquo loans

Insolvency creditors will only be satisfied after satisfaction of creditors entitled to claim the separationof an asset from the insolvency estate after the satisfaction of creditors holding a contractual pledge apledge acquired by attachment or a legal lien in an asset forming part of the insolvency estate and afterthe remuneration of debts created by activities of the insolvency administrator


No



Resembling procedures exist in relation to insolvency plans Even if the necessary majorities have notbeen achieved a voting group under certain circumstances shall be deemed to have consented to aninsolvency plan for example if the group of creditors suffer no loss by the insolvency plan comparedwith their situation without such plan



Particularly in order to maintain the enterprise an arrangement in an insolvency plan may be reachedAfter acceptance of the insolvency plan by the creditors the plan will be confirmed by the insolvencycourt As soon as confirmation of the insolvency plan has become binding the insolvency court willdecide on termination of the insolvency proceedings




Creditors to the insolvency estate are creditors who have made transactions with the insolvencyadministrator after the commencement of the insolvency proceedings These claims have to be paid inwhole by the insolvency administrator unless he has indicated lack of mass in an official way before


110


The debtor and its shareholders can take any legal and corporate action they deem sufficient torestructure the company However the debtor is always obliged to file for insolvency if a trigger forinsolvency occurs


Simplified procedures do exist but are not available for companies



The regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings and the GermanInsolvency Act



The commencement of foreign Non-EU insolvency proceedings will be recognized unless the courts ofthe state of the commencement of proceedings do not have jurisdiction in accordance with German lawor where recognition leads to the result which is manifestly incompatible with major principles ofGerman law in particular where it is incompatible with basic rights

111

Greece

George Chatzigiannakis Partner NOMOS Law Firm

wwwnomosgr email gcnomosgr tel +30 2310 239 104



The main types of security taken on immoveable property include the mortgage and the prenotation ofmortgage On the other hand moveable property can be secured through the pledge the chattel mortgageand the floating charge


According to the Greek Civil Code any transaction that is detrimental to the creditorsrsquo interest may beannulled if the debtor and his counterparty are acting in bad faith

According to the Greek Bankruptcy Code (ldquoGRBCrdquo) transactions which took place within the ldquosuspectperiodrdquo ie the period between the cessation of payments and the declaration of bankruptcy and couldbe detrimental to the creditors of an insolvent debtor may be annulled by the insolvency administratorFurthermore fraudulent acts committed by the debtor the last 5 years prior to the bankruptcy beingdeclared can also be annulled if the counterparty was aware of the debtorrsquos bad faith


The directors of a company are personally liable for the payment of corporate taxes and social securitycontributions By virtue of the GRBC after the cessation of payments the debtor must file for bankruptcyproceedings within a period of 15 days Failure to comply with the prescribed deadline could result tothe directors being held personally liable for damages which have been caused to the creditors due tothe fact that the debtor was trading whilst being insolvent

2 Taking action


The main formal procedures are the followinga) Voluntary BankruptcyThe insolvent debtor must file abankruptcy petition within a period of 15 days from the cessation of payments The debtor can initiatethe bankruptcy proceedings voluntarily even when the above mentioned cessation of payments isimminent Once the debtor is declared bankrupt a bankruptcy administrator is being appointed and hismain task is to undertake the management of the debtorrsquos assets and creditor-related matters GRBC alsomakes provision for the institution of Involuntary Bankruptcy according to which a creditor may applyto the competent court requesting for his debtor to be declared bankruptb) Rehabilitation ProcessTheinsolvent debtor being in a state of cessation of payments or in a situation where the cessation ofpayment is imminent may file before the Bankruptcy Court an application for entering the rehabilitationprocess The hearing usually takes place within a period of 2 months from the filing date and the

112

Bankruptcy Court may initiate the rehabilitation process if it is convinced that there are realisticprospects for the insolvent companyrsquos financial viability and that the creditorsrsquo interests are not affectedin a negative manner by the said process Within a period of 2 months the rehabilitation procedure mustbe either successfully (ratification of an agreement between the insolvent debtor and its creditorsrepresenting 60 of the total claims 40 of which should be secured) or unsuccessfully (rejection ofthe application or expiration of the prescribed period within the course of which the agreement shall beconcluded) terminated Upon filing of the application a moratorium on all enforcement actions may bedecided by the Court preventing the transfer of the debtorrsquos immovable and movable propertyc) Re-organization plan (post-bankruptcy)

A debtor can propose a re-organization plan simultaneously with his bankruptcy petition or within aperiod of 4 months (plus 3 months extension) after having been declared bankrupt The bankruptcyadministrator is also entitled to submit such a plan after the lapse of the above mentioned 4-monthperiod


NA


It depends on the particular case however the bankruptcy proceedings are more creditor-friendlywhereas the rehabilitation and re-organization proceedings are more debtor-friendly since the debtorsare protected from enforcement actions whilst they retain as a matter of fact control over the companyand its assets


The insolvency procedures shall commence when the debtor is in a general and permanent way unableto pay its due and payable debts Bankruptcy may be declared on the basis of mere threatened failureto perform when requested by the debtor himself


The application must be filed with the Multi-Member First Instance Court of the district where thecompanyrsquos registered seat is located and which has exclusive jurisdiction over insolvency proceedings


As mentioned above a company can be placed into insolvency proceedings either voluntarily orinvoluntarily as any creditor can file a petition requesting his debtor to be declared bankrupt(involuntary liquidation) In certain situations insolvency proceedings can also be initiated by thepublic prosecutor on grounds of public interest


Generally the competent court will be in charge of supervising the bankruptcy proceedings throughoutand will have exclusive jurisdiction thereto In addition to the general powers of supervision that thecourt is entitled to exercise it will also decide on the petition for the bankruptcy declaration theinitiation of the rehabilitation process or the re-organization plan as well as on the awarding of interimmeasures to the debtors


113

In principle the insolvency process will be concluded when 15 years after the formal declaration ofbankruptcy have lapsed or in case that the debtorrsquos assets do not suffice for the satisfaction of thecreditorsrsquo claims Alternatively the length of the proceedings may also depend on the duration of the re-organization proceedings or that of the liquidation proceedings (ie upon liquidation of all debtorrsquosassets)


All notices to creditors are published in the Bulletin of Judicial Publications of the Juristsrsquo PensionFund


Following the debtorrsquos bankruptcy declaration unsecured and general preferential creditors areprevented from enforcing their rights and remedies against the former


During the bankruptcy proceedings and given that it is in the creditorsrsquo interest and benefit the court canin rare circumstances and upon the debtorrsquos petition and creditorsrsquo committee consent permit the debtorto maintain possession of his assets alongside the liquidator

Are there any local law red-flags particularly relevant to a situation (issues requiring special attention-warnings etc)

The Ministry of Finance issued a Circular addressed to all Greek Tax Authorities which containedcertain guidelines on the application of the lsquoRehabilitation Procedurerdquo (Article 99 et seq of GRBC) Insummary the Tax Authorities are instructed to engage into specific actions (verification of amount owedto the State certification of such debts etc) when either a legal entity or an individual files for theinitiation of the Rehabilitation Procedure or upon ratification of the Rehabilitation Agreement The aimis to ensure that the claims of the Greek State against such debtors are fully ensured


Given the increasing economic crisis and recession that Greece is currently facing more and morepressure is being exercised on the government in order to legislate amend and regulate extensively onissues inherent to the GRBC As a result the GRBC in short time has undergone several amendments inthe areas of bankruptcy proceedings the rehabilitation process and the re-organization plan and itappears that it remains subject to constant change and review by the legislator

3 Creditor issues


After the declaration of bankruptcy all unsecured creditors are barred from enforcing their claims


Pursuant to the GRBC the creditors who secure their claims by way of a special privilege or a securityin rem (secured creditors) can satisfy their claims exclusively through the liquidation proceedingsconducted and are not prevented by the fact that the enforcement of claims has been barred Certainexceptions apply and indicatively we mention the creditorsrsquo assembly decision not to proceed with thesale of the insolvent debtorrsquos company as a whole In case that none of the statutory exceptions provided

114

by law apply the secured creditors may turn against the bankruptcy administrator by filing an in remclaim or they can either commence or continue the suspended execution proceedings and forced sale ofthe debtorrsquos assets

Will setndashoff apply and if so do any issues arise from this

GRBC provides for the right to set off creditorsrsquo claims against the debtorsrsquo claims A necessaryprecondition for exercising this right is that the creditorsrsquo claims have become due and payable prior tothe debtorrsquos bankruptcy However the creditors can be deprived of the right to set-off temporarily by arelevant court order


NA


There is no explicit provision under Greek law regulating the insolvency proceedings involvingcorporate groups or a procedural framework within which the assets and liabilities of a grouprsquoscompanies to be pooled for distribution purposes In legal terms each company-member is consideredto be distinct and independent from the corporate group to which it officially belongs


Upon commencement of the bankruptcy proceedings the creditors are called by the liquidator toannounce their claims and participate in creditorsrsquo meetings The creditorsrsquo meeting in turn mayestablish a creditorsrsquo committee composed of 3 ordinary and 3 substitute members The creditorsrsquocommittee duties generally include the duty of supervising the bankruptcy proceedings and assisting theinsolvency administrator in managing the insolvent debtorrsquos matters



Following the declaration of a debtor as bankrupt an insolvency administrator is appointed undertakingthe duty of managing the debtorrsquos estate and relevant matters (creditorsrsquo claims liquidation of assetsetc)


There are no provisions prohibiting the receiving of funding during the period of the insolvencyproceedings Nevertheless the funding that the debtor has received pursuant to a re-organization plan orrehabilitation process will have the highest ranking priority amongst the creditorsrsquo claims


See above

How will the proceedings affect employees and what rights do they benefit from

The declaration of a debtorrsquos bankruptcy does not automatically result to the termination of the existingemployment contracts The termination of the employment contracts is amongst the insolvency

115

administratorrsquos duties to be performedGreek law treats employment claims as preferential Hence afterbankruptcy expenses have been paid unpaid employee remuneration claims incurred within two yearsprior to the bankruptcy having been declared are satisfied


According to the GRBC regarding the treatment of pending contracts the ldquono terminationrdquo principle isexpressly provided as well as the right of option of the administrator to ldquosubrogaterdquo the mass ofcreditors to the position of the debtor It is important to note that there are certain types of contractswhich due to their duration form a special category and are being treated as such ie leases contractsof services or contracts for public utilities which continue to be in force without it being necessary forthe administrator to exercise this option However all contracts are terminated if they are of a personalcharacter or if the law provides so while contractual clauses about automatic termination or terminationrights are not affected by the declaration of bankruptcy


One of the duties held by the insolvency administrator is to notify and invite all creditors included in therelevant list drafted by the debtor to announce and thereafter validate their claims The claims will thenhave to be verified individually by the insolvency administrator before the Insolvency Court Judge


In announcing and validating their claims creditors are given a time limit of 3 months commencing fromthe date of the public notification of the decision declaring the debtor bankrupt Thereafter creditors thatfailed to make the relevant announcement on time are entitled to file an application before the court forverifying their claim


The following priority applies for claims during the bankruptcy proceedings1 Cost incurred in thebankruptcy proceedings2 Preferential claims (employee remuneration taxes and social securitycontributions)3 Secured claims4 Unsecured claims


NA



Both the rehabilitation and the re-organization procedures have cram-down effect and accordingly arebinding for all dissenting or non-participating creditors


See above


116

See above



The conducting of negotiations may be employed as an informal procedure in cases of restructuringSuch an alternative method though can only be successful under certain circumstances and is also subjectto various statutory limitations


The GRBC provides for an accelerating bankruptcy procedure The procedure however can only beapplied if two cumulative criteria are met Namely that the debtorrsquos assets value does not exceed theamount of euro100000 (One hundred thousand euros) and that no immovable properties are includedtherein



Further to the established national legal framework Greek law also incorporated EU Regulation13462000 Additionally the text of UNCITRAL Model Law on Cross ndashborder Insolvency is to a largeextent reflected in Law N38582010


Greek courts have widely recognized foreign insolvency proceedings

117

India

Mr Siddhartha George Partner Mr Vishnu Jerome Partner Poovayya amp Co Advocates amp Solicitors

wwwpoovayyanethomehtml email siddharthapoovayyanet vishnupclegalnet tel +91 9880355883 +91 98199 72712



A creditor can create a security in a number of ways under Indian law The most common way of takingsecurity is by creating a charge over the assets of a debtor A charge can be lsquofixedrsquo (over certain specificproperty) or lsquofloatingrsquo (over underlying assets that are subject to change) A floating charge does notaffect the ability of the debtor to use the underlying asset ndash only if the debtor fails to repay the loan orsuffers any other specified event of default does the floating charge become lsquocrystallisedrsquo or convertedinto a fixed charge

Alternatively the creditor may require the debtor to hypothecate mortgage pledge or grant a lien (asappropriate) in favour of the creditor over the assets of the debtor

Certain specific charges (including a mortgage) on movable property and immovable property of acompany have to be registered with the relevant Registrar of Companies under Section 125 of the[Indian] Companies Act 1956 as amended (the ldquoCompanies Actrdquo)1 in the prescribed form Thesecompulsorily registrable charges include inter alia a charge on any immovable property


The debtor company must have due capacity by virtue of its constitutional documents to enter into anydebt and security transactions

In addition certain past transactions entered into by a company that is being wound-up can be set asidePursuant to Section 531 of the Companies Act any transfer of property moveable or immovabledelivery of goods payment execution or other act relating to property made taken or done by or againsta company within a period of six (6) months prior to the commencement of its winding up shall bedeemed a fraudulent preference of its creditors and be invalid The essence of lsquofraudulent preferencersquo isthe giving of an improper benefit to a few creditors in preference to others leading to inequalitybetween them So it should be established that the dominant motive in the mind of the Company (actingthrough its directors) was to prefer one creditor in preference to other creditors

Further as per Section 531A of the Companies Act any transfer of property moveable or immovabledelivery of goods made by the company not being a transfer or delivery made in the ordinary course ofbusiness or in favour of a purchaser or encumbrancer in good faith made within one (1) year from thepassing of a resolution for voluntary winding up shall be deemed to be void against the liquidator Thepurpose of Section 531A is to preserve the assets of the company and to enable the company to carry outtransactions that might be for the benefit of those interested in the assets of the company An applicationunder this section for setting aside a transfer can be allowed where it is either proved that there was noconsideration for the transaction or that the consideration was so inadequate as to raise a presumption of

118

want of good faith


Indian law does not in general distinguish between the duties of the directors of a solvent company andthe directors of a company that is ldquoin distressrdquo or is being wound-up

A director under Indian law owes certain fiduciary duties to the company including the duty to act ingood faith and to ensure proper use of such directorrsquos powers These duties are in addition to suchdirectorrsquos duties of administration and compliance as required under the Companies Act The directorsof a company being wound-up will have additional responsibilities including calling shareholders andcreditors meetings and filings returns and statements

[1It may be noted that the Companies Bill 2012 which contains comprehensive amendments to theCompanies Act has been passed by Indiarsquos lower house of Parliament and is now beingconsidered by the upper house of Parliament]

2 Taking action


The shareholders of a debtor company can resolve to have the company voluntarily wound-up bypassing a special resolution under Section 484(1)(b) of the Companies Act The directors of a companypursuant to a ldquomemberrsquos voluntary winding uprdquo are required inter alia to make a declaration that thecompany is able to pay its debts in full (Section 488(5)) If the company cannot make such declarationthe resultant voluntary winding-up is referred to as a ldquocreditorsrsquo voluntary winding-uprdquo

The Companyrsquos creditors would be involved to a large degree in a creditorrsquos voluntary winding upprocess The creditors may decide the appointment of the liquidator and may also decide whether toappoint a committee of inspection whose members would be nominated by the Company (subject to thecreditorsrsquo consent) (Section 503 of the Companies Act)

In principle once the winding up resolution is passed and the creditorsrsquo meeting is held wherein thewinding up is approved the role of the Board of the Company diminishes significantly Practically uponthe appointment of the liquidator the liquidator would essentially undertake the process of winding upthe Company and carrying on the business of the company only to the extent as is beneficial to thewinding-up process and there would be little or no responsibility on the part of the Board or otherofficers of the Company


As set out above the creditors of a company have a bigger role in a creditorsrsquo voluntary winding up


In addition to the voluntary winding up provisions referred to above a company may be wound up bythe tribunal2 under Section 433 of the Companies Act

i if the company has by special resolution resolved that the company be wound up

ii if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting

119

iii if the company does not commence its business within a year from its incorporation or suspends itsbusiness for a whole year

iv if the number of members is reduced in the case of a public company below seven and in the caseof a private company below two

v if the company is unable to pay its debts

vi if the tribunal is of the opinion that it is just and equitable that the company should be wound up

vii if the company has made a default in filing with the Registrar its balance sheet and profit and lossaccount or annual return for any five consecutive financial years or

viii if the company has acted against the interests of the sovereignty and integrity of India the securityof the State friendly relations with foreign States public order decency or morality

A company shall be deemed to be unable to pay its debts (Section 434)-

i If a creditor has made a claim exceeding Rupees One Lakh Only (INR 100000-) and the company hasfailed to satisfy the claim for a period of three (3) weeks

ii If the execution or other process issued in favour of a creditor is returned unsatisfied or

iii if it is proved to the satisfaction of the tribunal that the company is unable to pay its debts

[2 In practice since the national companies law tribunal has not yet been set up the state HighCourts continue to exercise jurisdiction in such matters]


In the event that a petition for compulsorily winding-up a company is made before the tribunal underSection 439 the tribunal may inter alia make an order for winding up the company (Section 443) Thetribunal will notify the Official Liquidator (Section 444) who is required to submit a report to thetribunal within six (6) months setting out particulars of the capital assets and liabilities of the companyThe Official Liquidator has wide powers under Section 457 including inter alia to sell any assets ofthe company being wound up When the affairs of the company are completely wound-up the tribunalmay make an order dissolving the company (Section 481)

In the case of a voluntary winding up the company is required to pass a special resolution and appoint aliquidator The liquidator will then subject to the provisions of the Companies Act proceed to wind-upthe company and realize all of its assets pay its liabilities and distribute any surplus share capital


In addition to the voluntary winding-up procedure set out above certain persons may apply to thetribunal to compulsorily wind-up a company An application to the Court for winding up of a companycan be made

i by the company or

ii by any creditor or creditors including any contingent or prospective creditor or creditors or

iii by any contributory or contributories3 or

120

iv by all or any of the parties specified in clauses (i) (ii) and (iii) whether together or separately or

v by the Registrar of Companies

[3The term ldquocontributoryrdquo means every person liable to contribute to the assets of a company inthe event of its being wound up and includes the holder of any shares which are fully paid up andfor the purposes of all proceedings for determining and all proceedings prior to the finaldetermination of the persons who are to be deemed contributories includes any person alleged tobe a contributory (Section 428 of the Companies Act)]


As set out above the tribunal may upon a winding-up petition being presented before it order acompany to be compulsorily wound-up In addition the tribunal has wide powers to ldquomake any interimorderrdquo (section 443(c)) The tribunal will also oversee the exercise of the liquidatorrsquos powers (Section458 460 and 462)

Even in voluntary winding-up proceedings the tribunal has the power to appoint a liquidator where noliquidator is acting or to remove a liquidator for cause (Section 515) and to settle any questions(Section 518)

The Companies Act does not place any restriction on the powers of the High Court in relation towinding up proceedings In fact the courts have wide powers to commence winding up proceedings egif the court is of the view that it is ldquojust and equitablerdquo to commence the same


Depending on the size of the company the liabilities and the number of creditors it could take aminimum of six (6) months with no maximum time limit to wind up a company


In the case of a voluntary winding up the company shall within fourteen days of passing a resolution forvoluntary winding up provide notice of the same in the Official Gazette and in a newspaper beingcirculated in the same district as the registered office of the company The company is also required tomake statutory form filings in respect of the appointment of the liquidator The liquidator is alsorequired to make filings in respect of the winding-up process including yearly reports


No


No

3 Creditor issues


The right of an unsecured creditor to make a claim on the property would depend on the provisions ofvarious legislations such as the Companies Act the Transfer of Property Act 1882 and the Limitation

121

Act 1963

If the debtor is insolvent an unsecured or secured creditor will be required to obtain a judgment anddecree in its favour for the purposes of enforcing its claim on the property An order for the attachmentof property will be executed in accordance with the provisions of the Order XXI of the Code of CivilProcedure 1908 which inter alia contains provisions relating to notice of garnishment etc

In the event that a debtor company is already in winding-up a creditor (secured or unsecured) will haveto prove its debt against the liquidator


If the debtor company is solvent the procedure for enforcement by a secured or unsecured creditor willrequire the decree of a competent court against the debtor company Secured creditors have theadditional right of receiving preferential payment in the event of winding up of a company (subject tosatisfaction of workmenrsquos dues)


The tribunal may pursuant to Section 469 at any time after making a winding up order make an order onany contributory in the manner directed by the order any money due to the company from suchcontributory or from the estate of the person whom such contributory represents exclusive of any moneypayable by such contributory or the estate by virtue of any call in pursuance of the Companies Act andmay allow such person to set-off any money (including dividend or profit) due to such contributory as amember of the company


No


As set out above in the case of a creditorrsquos voluntary winding up the creditors may appoint theliquidator and also appoint committees of inspection



In the event of winding up of a company a Liquidator shall conduct the proceedings in winding up ofcompany and perform such duties in reference thereto as the tribunal may impose


Once a liquidator is appointed in respect of the company the companyrsquos business is carried on only tothe extent that it is beneficial to the winding-up of the company The Liquidator does however have theright to raise any money required by creating a security over the companyrsquos assets


Not applicable under Indian law

122


The Companies Act protects the rights of the workmen of a company by providing preferential paymentof workmenrsquos dues over all other dues payable by the company


Please see our responses in respect of lsquofraudulent preferencersquo and lsquoavoidance of certain transactionsrsquo setout above



In winding up proceedings instituted by a creditor the creditor will petition the court to commencewinding up proceedings with respect to a company where such company has been given notice of thedebt due to the creditor and the debt has remained unpaid for three (3) weeks from the date of thenotice Please also see our earlier responses in respect of compulsory and voluntary winding-upprocedures


The official liquidator is required to provide fourteen (14) daysrsquo notice to fixed creditors of thecompany to prove their debts or claims and to establish any title they may have to against the assets ofthe company


The priority of charges in winding up proceedings is as follows

1 Dues owed to employees

2 Dues owed to secured creditors

3 Dues owed to the government and

4 Dues owed to unsecured creditors


Indian law requires various notices filings and returns to be filed and issued at specific times duringwinding-up proceedings A creditor should obtain specific advice in respect of what filings are requiredto be made by it



No cram down procedures exist in Indian law

123


Cases pertaining to liquidation or winding up are concluded by an order of the High Court of the state inwhich the registered office of the company is situated Cases pertaining to restructuring of a companyare concluded by the Board for Industrial and Financial Reconstruction (ldquoBIFRrdquo) which approves thescheme of reconstruction


A secured creditor may enforce its security outside the winding up proceedings under the Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002



In India restructuring can only be carried out through formal proceedings ie court proceedings Theprovisions of the Companies Act provide for amalgamation andor restructuring envisage intervention ofthe courts Restructuring of sick companies is carried out by the BIFR


No provisions for acceleration of the winding up process exist in India



India is not a party to any international treaty on bankruptcy or insolvency


Under Section 44A of the Code of Civil Procedure 1908 (ldquoCPCrdquo) a decree of the superior courts ofcertain reciprocating territories is executable as a decree passed by a domestic court in India The CPCcontains a list of reciprocating territories which includes the United Kingdom Singapore Hong Kongamong others

Where a country is not a reciprocating territory a judgment obtained from such a country would requireto be enforced in India A party seeking enforcement of a foreign decree or judgment must institute afresh suit in India on the basis of such decree or judgment

124

Indonesia

Ira Andamara Eddymurthy Partner Soewito Suhardiman Eddymurthy Kardono

wwwssekcom email iraeddymurthyssekcom tel+62 21 5212038



A security interest created by a security agreement such as a pledge mortgage Hak Tanggunganfiduciary security or collateral right to warehouse receipt and is in theory immediately enforceablewithout judicial enforcement proceedings if the borrower fails to pay when due any amount outstandingunder a credit agreement or following a declaration of default No prior demand for payment is legallyrequired although this is a common contractual condition In theory a grantee of security may exerciseall the powers and rights of a security conferred by statute or otherwise and may sell or otherwisedispose of all the title to an interest in the secured objects through a public auction or a private sale orby court order as the grantee of security may in its sole and absolute discretion think fit Such principleis also recognized in Article 55 of Law Number 37 year 2004 regarding Bankruptcy and Suspension ofDebt Repayment (October 18 2004) (ldquoBankruptcy Lawrdquo) In the event of bankruptcy a secured creditormay exercise its security rights as if there is no bankruptcy after 90 days from the date of bankruptcydeclaration

In practice however auction houses often request a court order to implement the auction processdespite the fact that the law and the security agreement do not require such a court order This is alsodone because the buyers of collateral would prefer to have an execution order issued by a court on theassumption that such an order would reduce the success of a later attempt by the debtor to recover itsproperty from the buyer In general enforcement of security in Indonesia is time consuming difficult andcostly especially if it involves judicial enforcement


Article 41 of the Bankruptcy Law provides that any actions conducted by the company prior to thebankruptcy can be annulled by the Commercial Court if the action damaged the interest of creditors

Article 42 provides that transactions entered into within one year prior to the bankruptcy decision canbe unwound if they are proven to be entered into with knowledge that they will damage the interests ofother creditors In respect of transactions between the company and certain affiliated parties suchknowledge will be presumed


Law Number 40 year 2007 regarding Limited Liability Companies (August 17 2007) (ldquoCompany Lawrdquo)regulates Director liability Article 97 paragraph 2 of the Company Law provides that a Director mustmanage the company in good faith and with full responsibility Article 97 paragraph 3 further providesthat members of the Board of Directors are personally responsible and also on a joint and several basisfor company losses if such director negligently carries out his or her duties Pursuant to Article 104 ofthe Company Law such liability extends to bankruptcy

125

2 Taking action


The company or its creditor(s) can file a bankruptcy or PKPU proceeding


The company can enter into private negotiations with its creditors


A PKPU is both creditor-friendly and debtor-friendly For a creditor a PKPU does not expose it to therisk of having to pay the receiverrsquos fee in a bankruptcy which is typically more expensive than anadministratorrsquos fee in a PKPU

For a debtor a PKPU is friendly because the company can influence the composition plan which can bebeneficial to the debtor company


Article 2 of the Bankruptcy Law provides that a company can be declared legally bankrupt if it has twoor more Creditors and has failed to pay at least one debt which is due and payable


The companydebtor or its creditor can file a bankruptcy proceeding to the Commercial Court (Article 6of the Bankruptcy Law) The petition for bankruptcy must be submitted by an advocate unless suchpetition is submitted by the Prosecutorrsquos Office Bank Indonesia Financial Services Authority or theMinister of Finance (Article 7) The process for filing a PKPU proceeding is similar with the processfor filing a bankruptcy proceeding


The company or its creditor(s) can place the company into insolvency proceedings


In a bankruptcy proceeding the court has the power to bankrupt a company to determine any challengedamount of debt and to determine the supervisory judge and the receiver in the event the company isdeclared bankrupt

In a PKPU proceeding the court has the power to decide on a temporary and permanent PKPU todetermine any creditorrsquos challenge of an acknowledged amount of debt to appoint the supervisory judgeand the administrators and to ratify or to reject the composition plan


The Court will decide whether a company is bankrupt or not within 60 days after the bankruptcy petitionis registered If the company is declared bankrupt the bankruptcy terminates when all payments havebeen made to all creditors

126

A PKPU proceeding will take between 45 days to 270 days maximum


In a bankruptcy proceeding

a After the court decides that the company is bankrupt according to Article 15 paragraph 4 the receiverwill announce in the State Gazette and two newspapers the following matters (i) name address andwork of the debtor (ii) name of the supervisory judge (iii) name address and the work of the receiver(iv) name address and the work of the member of the temporary creditors committee if it has beenappointed and (v) domicile and time of the first creditors meeting

b Pursuant to Article 90 paragraph 4 the receiver shall summon all creditors having voting rightsthrough advertisement in at least two daily newspapers

c Pursuant to Article 114 the receiver must announce in two daily newspapers the following matters(i) the due date for submission of claims (ii) the due date for tax verification to determine the amount oftax obligations in accordance with the taxation laws and regulations and (iii) the day date time andplace for creditors meeting for the verification of receivables

d In the event there is a ratification of a composition the receiver or administrator shall announce suchcomposition in the State Gazette and at least two daily newspapers

e The receiver must announce in two daily newspapers invitation to creditors after the decision ofcomposition plan rejection obtains a permanent legal force

f The Receiver must announce in two daily newspapers the day hour and venue for the creditorsmeeting regarding settlement of the bankruptcy assets

g Pursuant to Article 202 paragraph 2 the Receiver must announce in two daily newspapers the end ofa bankruptcy

In a PKPU proceeding the administrator will announce in the State Gazette and two newspapers thetemporary PKPU decision invitation to hearing for extension to a permanent PKPU (date time venue ofthe hearing) the appointed supervisory judge and administrators the summary of the composition planthe end of the PKPU and if any the ratification or rejection of a composition plan


The benefit of a bankruptcy proceeding for a debtor is that it will not be liable to pay any debt after it isdeclared bankrupt except in accordance with the Bankruptcy Law procedures for settlement of thebankruptrsquos assets

The obligations of a company to pay its debts are suspended during a PKPU until a composition plan isaccepted or rejected


Please see our responses below


No

127


Yes political factors can come into play if state owned companies or politically connected businesspeople are involved in the proceedings

3 Creditor issues


The Bankruptcy Law prioritizes payment to secured creditors and preferred creditors which exposesunsecured creditors

Article 138 provides that unsecured creditors may not receive any payment if secured creditors canprove that the companyrsquos assets are insufficient to repay secured debts


Article 55 of the Bankruptcy Law provides that a secured creditor is privileged to exercise its securityrights after 90 days from the courtrsquos declaration of bankruptcy

In a PKPU a secured creditor may not enforce its security during the PKPU proceeding


Yes set-off may apply in certain circumstances


Affiliated companies are treated equally with other creditors


Please see response above regarding the possibility to unwind transactions between the company and itsaffiliates within one year of the date of the bankruptcy


Yes In a bankruptcy a creditor committee may be established on court order It is tasked to advise thereceiver but any such advice does not bind the receiver

The creditor committee is also permitted to check all records documents and letters pertaining to thebankruptcy

In a PKPU the court must establish a creditor committee if there are substantial debts involved or ifrequested to do so by creditors representing at least frac12 of all acknowledged debts The administrator ofa PKPU shall request and consider recommendations from the creditors committee



128

A Receiver may continue the business of the bankrupt company on approval from the temporary creditorcommittee or the supervisory judge

A debtor may also be allowed to continue the business activities of the company which is known as aDebtor in Possession (DIP) (See Section 4 point 3 below)


Typically by obtaining further debt or equity investment by a third party


Under the Bankruptcy Law a company can continue to operate its business with the approval of at leastfrac12 of the unsecured creditors


Employees are protected under Article 39 and Article 252 of the Bankruptcy Law They may resign orbe terminated but are entitled to all amounts due to them prior to such event and also severance andservice pay under the Manpower Law


Pursuant to Articles 36 to 38 of the Bankruptcy Law ongoing commercial arrangements at the time ofdeclaration of bankruptcy may be clarified by the counterparty in each agreement to the receiver orsupervisory judge who shall decide on the continuing effectiveness or termination of the agreement Ifthe agreement is terminated the counterparty may claim compensation and will be treated as aconcurrent (unsecured) creditor

If the agreement regards the transfer of traded goods the agreement becomes ineffective at thedeclaration of bankruptcy and the counterparty may act as unsecured creditor to obtain compensation



The administrator in a PKPU proceeding or the receiver in a bankruptcy case will announce in anational newspaper the deadline for creditors to register or file their claims


The timing is determined by the supervisory judge and receiver in a bankruptcy case and anadministrator in a PKPU case


The claims will rank as follow

1 Secured Creditors

2 Preferred Creditors and

129

3 Unsecured Creditors


No



We understand that cram down shall mean involuntarily imposition by a court of composition plan wherecourt is allowed to reduce the principal amount or change the interest rate or other terms in the loanagreement This is not possible in Indonesia unless approved by the requisite creditor votes


Please see above


Please see above



Yes through private negotiations


No



Indonesian courts do not recognize for enforcement foreign court judgments However the decision onthe Indonesian court can be recognized in other jurisdiction For example in the PT Arpeni PratamaOcean Line bankruptcy case the US Bankruptcy Court entered an order recognizing the insolvencyproceeding in Indonesia and extending comity to the plan to restructure debts of more than USD 489million This is the first time a US Bankruptcy Court has recognized a proceeding under Indonesiarsquosinsolvency law


Indonesia does not recognize foreign court judgments A foreign arbitration award is typicallyenforceable in Indonesia provided that the country in which it is rendered is a party to an enforcementtreaty with Indonesia and the subject matter of the award is commercial in nature

130

Ireland

Inez Cullen Associate Brown Rudnick LLP

wwwbrownrudnickcom email icullenbrownrudnickcom tel 35316641738



Debenture

A debenture is a document which contains a covenant by a company to pay all sums due or to becomedue by the company to the lending institution and which contains a charge (fixed andor floating infavour of the lending institution)

Mortgage

A legal mortgage is a lsquoconditional transferrsquo of a property to a lending institution that may becomeabsolute if the mortgagor falls into arrears and is unable to make the repayments which it covenants tomake

The main elements of a mortgage include the covenant to pay the clause relating to the property andassets of the borrower to be secured the negative pledge restricting the borrower from creating anyother charge over those assets ranking equal to the current charge a statement that the security iscontinuing until full repayment and a description of the events that give rise to default and which justifythe appointment of a Receiver in order to enforce the security

Charge

A charge is the form of security for the repayment of a debt or performance of an obligation consisting ofthe right of the lending institution to receive payment out of some specific fund or out of the proceeds ofthe realisation of specific property

A fixed charge is security over a particular asset Conversely a floating charge constitutes a charge overall assets of the borrower company as acquired from time to time The company remains free to dealwith its assets in the ordinary course of business The charge only becomes a fixed charge uponcrystallisation Crystallisation occurs on the appointment of a receiver or liquidator and the floatingcharge fixes on all assets in the ownership of the company at that time A fixed charge gives the bestposition to a lending institution as regards any consequences of enforcement The main disadvantagewith a floating charge is that preferential creditors such as the revenue commissioners rank in priority tothe floating charge but after the fixed charge

Unless the lending institution lodges a notice of the fixed or floating charge created by a company within21 days of its creation with the Companies Registration Office (ldquoCROrdquo) the charge will be void againstthe liquidator or any creditor of the company

Lien

131

A lien is the right to hold the property of another as security for the performance of an obligation Aparticular lien exists only as security for the particular debt incurred

Pledge

A pledge arises where documents of title for a property are delivered by the pledgor to the pledgee to beheld as security for the payment of a debt or for the discharge of some other obligation The subjectmatter of the pledge will be restored to the pledgor as soon as the debt is discharged Where a definitetime for payment has been fixed the pledgee has an implied power of sale upon default

Guarantees Life Assurance Policies

In addition to the borrower entering into security a lender may also insist upon a guarantee by a thirdparty to be answerable for the default of the borrower

A lender may also request that a life assurance policy be put in place for key personnel to the value ofthe loan being taken out


Fraudulent preference under Section 286 of the Companies Act 1963

(the ldquo1963 Actrdquo)

Section 286 of the 1963 Act allows the court to void any transactions involving company property beingtransferred to creditors made within the 6 months prior to the insolvent winding up The section applieswhere it is shown that the paymenttransaction was made with the intention to prefer that creditor to thedetriment of other creditors This 6 month period is extended to 2 years where the paymentdisposal wasmade in favour of a connected person A connected person includes a director or a shadow director

Fraudulent disposition of property under Section 139 of the Companies Act 1990 (the ldquo1990 Actrdquo)

This section enables a liquidator or creditor on a winding up to seek the return of property where thedisposal of the property had perpetrated a fraud on the company its creditors or its members There isno need to prove any intent to defraud It is the effect of the disposal that is relevant Instead of orderingthe return of the property the court can also order that the person who appears to have benefited fromthe disposal pay a sum in respect of the property back to the company

Invalidation of a Floating Charge under Section 288 of the 1963 Act

Section 288(1) of the 1963 Act provides that a floating charge on the undertaking or property of thecompany created 12 months before the commencement of the winding up shall unless it is proved thatthe company was solvent immediately after the charge was created be invalid The 12 month period isextended to 2 years in the case where the charge is created in favour of a connected person


When a company encounters financial difficulty the directors are under significant legal obligationsincluding personal liability of the companyrsquos debts if the company continues to trade while insolventGenerally speaking a company is insolvent when its liabilities are greater than its assets or when it canno longer pay its debts as they fall due

Liquidatorrsquos obligation to submit a Section 56 Report

132

Section 56 of the Company Law Enforcement Act 2001 requires a liquidator of an insolvent company tosubmit a report to the Office of the Director of Corporate Enforcement (ODCE) on the affairs of thecompany within 6 months of his appointment This report sets out among other things the liquidatorrsquosview as to whether the directors acted honestly and responsibly

The liquidator will be obliged to bring a restriction application under Section 150 of the 1990 Actagainst the directors unless relieved of the obligation of doing so by the ODCE

Restriction Applications under Section 150 of the 1990 Act

Section 150 of the 1990 Act obliges the court to restrict a director of a company that goes in to insolventliquidation unless that director proves that he acted honestly and responsibly in relation to the conduct ofthe affairs of the company and that there is no other reason why it would be just and equitable to restricthim Restricted individuals cannot act as a director or secretary of another company for a period of 5years unless that company has a paid up share capital of euro63487 in the case of private companies oreuro317435 in the case of public companies

It is an offence for a restricted director to subsequently act as a director of a company which does notmeet these minimum capital requirements Such a director may be made personally liable for the debtsof such a company if it goes into insolvent liquidation

A company which meets these capital requirements and seeks to appoint a restricted person to its boardwill itself be subject to the following restrictions

(i) the company cannot avail of the whitewash procedure for the provision of financial assistance forthe purchase of its own shares

(ii) the company cannot avail of the exemptions under the Companies Acts 1963-2012 (the ldquoCompaniesActrdquo) to the prohibition on a company making loans quasi-loans and entering into credit transactions infavour of directors and persons connected with the directors and

(iii) the restrictions that preclude public limited companies from allotting shares for noncashconsideration unless certain conditions are satisfied will apply to a private limited company whichappoints a restricted director to its board

In determining whether to make a restriction order the court considers any incompetence or lack ofprobity on the part of the director and examines the directorrsquos responsibility for the insolvency of thecompany In addition the court reviews the extent to which the director has complied with hisobligations under the Companies Acts It is a defence for a director to show that he acted honestly andresponsibly in relation to the affairs of the company Mere commercial misjudgment will not usually besufficient to merit the restriction order

Disqualification of Directors under Section 160 of the 1990 Act

A disqualification order results in a director being disqualified from being appointed or acting interalia as a director or officer of a company or being in any way either directly or indirectly concerned inthe promotion formation or management of any company A disqualification order is usually for a periodof 5 years however the court does have a discretion to lengthen or shorten this time period

The grounds for disqualification orders fall into 2 categories ndash (a) automatic disqualification and (b)disqualification on application to the court

Automatic disqualification occurs where a person is convicted of an indictable criminal offence on

133

indictment (ie by jury trial) in relation to a company or where a person is convicted on indictment ofan indictable offence in relation to fraud or dishonesty

The grounds for disqualification on application to the court include

(i) fraud in relation to the company its members or its creditors

(ii) former convictions for reckless or fraudulent trading in relation to the company (see further below)

(iii) the court deems the individual to be ldquounfit to be concerned in the management of a companyrdquo

(iv) the individual has been ldquopersistently in default in relation to relevant requirementsrdquo This relates toan individual being convicted of offences or defaults under the Companies Acts Where an individualhas been convicted of an offence or a default order has been made against him 3 or more times within 5years he is deemed to have been in default An example of this could be a failure to file annual returnsand

(v) an individual was a director of a company that was involuntarily struck off the Register ofCompanies for failing to file annual returns The courts have disqualified individuals under this headingwhere the company had substantial liabilities at the time of strike off This is to penalise directors thatsimply abandon insolvent companies as an alternative to liquidation

An application for a disqualification order can be made by a number of parties including inter alia theODCE the Director of Public Prosecutions a liquidator examiner creditor officer of member of thecompany Disqualification orders have been rare to date in Ireland However the ODCE is becomingmore active in bringing applications under Section 160

Sections 202 - 205 of the 1990 Act

These sections deal with the books and records to be maintained by a company Breach thereof canresult in personal liability for the officers of the company where it is insolvent and the court forms theview that the lack of proper books impedes the orderly conduct of the liquidation

Personal Liability for Company Debts

The effect of Section 251 of the 1990 Act is that the powers ordinarily vested in a liquidator to examinecompany officers recover company assets and swell the resources available to creditors of thecompany can be exercised by for example a creditor or the ODCE The significance of this fordirectors is that the legal provisions exist to allow a creditor to make directors personally liable forcompany debts in certain circumstances It would be a more difficult prospect for directors to defendsuch proceedings for imposition of personal liability initiated by a creditor ODCE or the liquidator ifthey neglected their obligations to seek an orderly wind up of the company

Reckless trading under Section 297A(1)(a) of the 1963 Act

Directors may be made personally liable for all or part of the debts of an insolvent company if they havebeen knowingly a party to the carrying on business in a reckless manner A director is deemed to beacting in a reckless manner where he ought to have known that his actions or those of the companywould cause loss to the creditors of the company or where he allows the company to incur further debtwhen he knows it is unlikely the company will be able to pay its debts as they fall due

The section allows personal liability to be imposed on directors for the debts (all or part) of thecompany A liquidator will often consider bringing such an application under this section to swell the

134

assets of an insolvent company for the benefit of creditors the liquidator may work in tandem with agroup of creditors who indemnify his costs

The courts apply a subjective test in dealing with applications under this section and will have regard tothe position and experience of the director It is a defence for a director to show that he acted honestlyand responsibly

Fraudulent trading under Section 297A(1)(b) of the 1963 Act

Directors may be made personally liable for the liabilities of an insolvent company where a director isknowingly a party to the carrying on of a business with an intent to defraud creditors The courts have seta high standard of proof under this section and successful prosecutions are relatively rare A liquidatorwill need to show that the directors were guilty of either real moral blame or an active intent to defraud

Misfeasance under Section 298 of the 1963 Act

This section relates to breaches of fiduciary duty of directors to the company and creditors Where adirector has been guilty of misfeasance or breach of duty or has retained or misapplied companyproperty the court may require a director to return the property with interest or contribute to the assetsof the company

2 Taking action




The company may apply under section 201 of the 1963 Act as amended and invite the court to order theconvening and holding of meetings of creditors or members and where a majority representing 75 invalue at those meetings approve a scheme to subsequently order that the scheme be binding Thecompromise or arrangement with creditors is usually proposed when the company is in financialdifficulties Such a scheme as approved by the court will be binding on dissenting absent or untraceablemembers or creditors

In order to avail of the provisions of section 201 - 203 of the 1963 Act applicants must meet certainrequirements

(i) the applicant must have locus standi

(ii) the Company must support the application

(iii) schemes must not be contrary to law or ultra vires

(iv) where capital is reduced the normal rules of capital maintenance apply and

(v) where relevant there must be compliance with the rules of the Irish Takeover Panel

Although sections 201 ndash 203 are silent on the point it has been decided that the court cannot approve anarrangement that does not have the approval of the company concerned

135

In order for a scheme of arrangement or compromise to be binding it must first receive the sanction ofthe court Section 201 (3) of the 1963 Act provides ldquoIf a majority in number representing three-fourthsin value of the creditors or class of creditors or members or class of members as the case may bepresent and voting either in person or by proxy at the meeting vote in favour of a resolution agreeing toany compromise or arrangement the compromise or arrangement shall if sanctioned by the court bebinding on all the creditors or the class of creditors or on the members or class of members as the casemay be and also on the company or in the case of a company in the course of being wound up on theliquidator and contributories of the companyrdquo

Section 203 of the 1963 Act as amended provides that the court may either by order sanction in thecompromise or arrangement or subsequent order make provision for all or any of the following matters

(i) the transfer to the transferee company of the whole or any part of the undertaking and of the propertyor liabilities of any transferor company

(ii) the allotting or appropriation by the transferee company of any debentures policies or other likeinterests in that company which under the compromise or arrangement are to be allotted or appropriatedby that company to or for any person

(iii) the continuation by or against the transferee company of any legal proceedings pending by oragainst any transferor company

(iv) the dissolution without winding up of any transferor company

(v) the provision to be made for any persons who within such time and in such manner as the courtdirects dissent from the compromise or arrangement

(vi) such incidental consequential and supplemental matters as are necessary to secure that thereconstruction or amalgamation shall be fully and effectively carried out

Under section 201 (1) the court may on the terms as seem just stay all proceedings or restrain furtherproceedings against the company for such term as the court thinks fit

Examinership

When the section 201 remedy has been considered andor attempted and failed there still remains theoption of examinership

An examinership is the procedure whereby an insolvent company may seek protection from the Courtsagainst its creditors to assist its survival (maximum of 100 days)

On the Examiners appointment (with effect from the date of the petition being presented)

(i) no proceedings for winding up the company can be started and no receiver can be appointed overany part of the companys property or undertakings

(ii) no attachment distress or other execution proceedings can be put in force against the property andno security over the companys property and assets can be enforced (although rights of set-off in relationto bank accounts can be exercised) However this is subject to the Financial Collateral ArrangementsDirective which states that examinership cannot prevent certain specified collateral arrangements beingenforced

(iii) no steps can be taken to enforce security granted by third parties for the companys obligations

136

except where the third party chargor has agreed to take an assignment of a secured creditors rights tovote in the scheme of arrangement and

(iv) no Order pursuant to Section 205 (minority oppression) can be made by the Court

The concept was first introduced in the Companies (Amendment) Act 1990 following the collapse of theGoodman group of companies and has subsequently been modified by the Companies (Amendment) (No2) Act 1999 (together the ldquoActrdquo)

Before the court has the jurisdiction to exercise its discretion to appoint an Examiner it must first appearto the court that

Section 2

(i) the company is unable to pay its debts or is likely to be unable to pay its debts

(ii) no resolution to wind up the company has been passed

(iii) no order for the winding up of the company has been made and

Section 3(6)

No receiver stands appointed to the company for a continuous period of 3 days or more

Section 2(3) of the Act provides that a company shall be unable to pay its debts for the purposes of theAct if

(i) it is unable to pay its debts as they fall due (going concern basis)

(ii) the value of its assets is less than the value of its liabilities taking into account its contingent andprospective liabilities (balance sheet basis)

(iii) a demand pursuant to section 214 of the 1963 Act remains unsatisfied 21 days after service or

(iv) if execution or other process issued on a judgment is returned unsatisfied

Section 2(4) provides that the court may infer an inability likelihood of inability to pay its debts wherethe company has sought significant extensions of time to pay its debts from its creditors

In considering a petition for appointment of an Examiner the court must first form the view

(i) the company is or is likely to be unable to pay its debts

(ii) there is no resolution for the winding-up of the company and

(iii) no order has been made for the winding-up of the company

Following that initial consideration the court will only make an order appointing the Examinerldquowhere it is satisfied that there is a reasonable prospect of the survival of the company and the wholeor any part of its undertaking as a going concernrdquo

The petition must nominate a person to be appointed Examiner

The petition for appointment of an Examiner must be accompanied by

137

(i) a consent signed by the person nominated to be Examiner

(ii) a copy of a compromise or scheme of arrangement in relation to the companyrsquos affairs (if alreadyprepared) and

(iii) report in relation to the company by an independent accountant who can be either the companysauditor or a person who is qualified to be appointed as an auditor of the company

Order 75A Rule 4(4) of the Rules of the Superior Court (ldquoRSCrdquo) provides that a petitioner shall on thesame day as the presentation of the petition make an application to the court for directions Rule 5(1) ofthe RSC provides that the court may make such Order or Orders as it thinks fit and may give suchdirections as it things fit In particular the Rule indicates that the court may give directions as to theparties on whom the petition should be served the mode of service the time for such service the datefor the hearing of the petition (if different to that appointed by the Registrar) and whether the saidpetition should be advertised and directions as to the mode of such advertising

Order 75A Rule 5(2) of the RSC provides that the court may appoint any proposed Examiner as interimExaminer with the same powers and duties in relation to the company until such time as the hearing ofthe hearing of the petition or such other adjourned date In most cases the Petitioner will apply for theappointment of an interim Examiner Generally the reason for this is that the time period within whichthe Examiner must complete his task (70 days ndash can be extended to 100 days) is relatively short and runsfrom the date of the petition

Receivership

Receivership is a method for charge holders to recover monies from companies where a loan under adebenture is in arrears or some other event has happened by which under the terms of the debenture thesecurity becomes enforceable for example the company has gone into liquidation or the security is injeopardy

The Receiver will sell the companyrsquos assets so the lender can recover the money owed to them Theprocess is usually used by lending institutions to secure large loans

Appointing a Receiver has major advantages for lenders as it gives them the opportunity to take controlof the charged assets immediately This eliminates any further exposure or risk should the borrowercontinue to default on the loan

A Receiver may be any person who is neither a body corporate nor an undischarged bankrupt He willusually but not always be an accountant He may be appointed by the court or out of court to act asReceiver of the property of a company The duties of a Receiver are normally set out in the instrumentunder the terms of which he is appointed

Technically speaking it is a method of enforcement but is often regarded as a form of insolvencyprocedure Of note however receiverships are not included in Council Regulation (EU) No 13462000on Insolvency Proceedings

Liquidation

When a company reaches the end of its life or becomes insolvent one of the options open to it is to beformally wound up by a liquidation process The three main liquidation options are (i) membersvoluntary liquidation (ii) creditors voluntary liquidation and (iii) court liquidation

1 Members Voluntary Liquidation

138

This is the procedure used to deal with solvent companies Under this type of liquidation all creditorsare paid in full and the surplus is returned to the shareholders

When a company has completed its purpose or the directors of a company decide to retire a taxefficient way of releasing the surplus which may have accumulated is to place the company into amembers voluntary liquidation

The tax advantage for shareholders is that a capital gain received on their shares will only be taxed at30 whereas if the surplus monies were taken out as salary then these monies may be taxed at a muchhigher marginal tax rate

2 Creditors Voluntary Liquidation

This is the most commonly used procedure for dealing with an insolvent company A creditors voluntarywinding up will arise upon conversion of a membersrsquo voluntary winding up or alternatively pursuant tosection 251(1)(c) of the 1963 Act which provides that the members can in general meeting resolve thatthe company cannot by reason of its liabilities continue its business and that it be wound up voluntarilyThe essential features of a creditorsrsquo voluntary winding up are the absence of a declaration of solvencyand further that the winding up is instigated by the members themselves

3 Court Liquidation

Occurs when a petitioner petitions the High Court to appoint a liquidator It is generally used bycreditors of a company seeking payment of monies due to them A court liquidation may be referred to asan official liquidation or a compulsory liquidation

Section 213 of the 1963 Act provides inter alia that a company may be wound up by the court if

(i) the company has by special resolution resolved that the company be wound up by the court

(ii) the company does not commence its business within a year from its incorporation or suspends itsbusiness for a whole year

(iii) the number of members is reduced in the case of a private company below two or in the case ofany other company below seven

(iv) the company is unable to pay its debts

(v) the court is of opinion that it is just and equitable that the company should be wound up or

(vi) the court is satisfied that the companys affairs are being conducted or the powers of the directorsare being exercised in a manner oppressive to any member or in disregard of his interests as a memberand that despite the existence of an alternative remedy winding up would be justified in the generalcircumstances of the case so however that the court may dismiss a petition to wind up under thisparagraph if it is of opinion that proceedings under section 205 of the 1963 Act would in all thecircumstances be more appropriate



One of the following may apply to the High Court to propose a scheme of arrangement

139

(i) the company

(ii) any creditor of the company

(iii) any member of the company and

(iv) in the case of a company being wound up the liquidator

Following such application the High Court will order meetings of the creditors and embers to vote inrespect of the scheme of arrangement

Examinership

(i) the company itself ndash on foot of a resolution of the members of the company The directors should notpresent a petition in the companyrsquos name unless they have been authorised to do so by an ordinaryresolution of the members However the court has allowed petitions brought in a companyrsquos name onfoot of a resolution of the directors However given that the directors are also given locus standi topresent a petition the safer course of action is to only present a petition in a companyrsquos name on foot ofthe membersrsquo resolution

(ii) the directors of the company ndash unanimity is not required but a majority of the board must resolve topresent a petition A petition presented on foot of a directors resolution should be brought in the name ofthe directors or in the name of one of them if she is so authorised by the board resolution

(iii) a creditor or contingent or prospective creditor including an employee of the company Section3(5) of the Companies (Amendment) Act 1990 (as amended) provides that the court shall not hear apetition presented by a contingent or prospective creditor until security for costs as the court considersreasonable has been given and

(iv) members of the company holding not less than 110 of the paid up share capital of the company thatcarries the right to vote at a general meeting of the company

Receivership

(i) a debenture holder on foot of a debenture document

(ii) the High Court under specific statutory powers such as that contained in the Land and ConveyancingLaw Reform Act 2009

(iii) the High Court under its equitable jurisdiction under the Supreme Court of Judicature Act (Ireland)1877 and

(iv) the National Asset Management Agency (NAMA) under the National Asset Management AgencyAct 2009


The members

For members to voluntarily wind up their company a majority of the directors must make a statutorydeclaration that having made a full enquiry into the affairs of the company they are of the opinion thatthe company will be able to pay its debts in full within a period not exceeding 12 months from thecommencement of the winding up Within 28 days of the making of the declaration of solvency the

140

members must pass a special resolution to wind up and appoint a liquidator

Creditors Voluntary Liquidations

The members

The company directors usually initiate proceedings for liquidation of their company in their company isinsolvent

In a creditors winding up the company is obliged to summon a meeting of the creditors The creditorsmust receive at least ten days notice and their meeting must be held on the same day or the day after themeeting of the members at which the resolution for voluntary winding up is to be proposed

Notice of the meeting must be advertised at least 10 days before the date of the meeting in two dailynewspapers circulating in the district of the registered office of the company The creditors have theright to supervise the conduct of the liquidation The creditors at their meeting may appoint a committeeof inspection for this purpose The members and the creditors must be summoned to all meetings calledby the liquidator

Compulsory Liquidations

The Company

The grounds upon which a company can petition for its own winding up are set out in Section 213(c)-(f)of the 1963 Act Although a company can petition for its own winding up the presentation of such apetition is relatively rare compared with creditor petitions For the members of both solvent andinsolvent companies it is generally construed as preferable to resolve in favour of a members orcreditors voluntary winding up because of cost and publicity issues It is also generally considered thatthe directors of the company are unable to present a petition for the winding up of a company

Creditors

The grounds upon which a creditor can petition for the winding up of a company are those set out inSection 213(c)-(f) of the 1963 Act Section 215 of the 1963 Act provides that a creditor or creditorsincluding contingent or prospective creditors have locus standi to petition the court to have a companywound up However for a creditor to be able to present a petition he must have a present liquidateddebt due and owing to him Section 215(c) of the 1963 Act provides that a court shall not hear a windingup petition presented by a contingent or prospective creditor unless such security for costs have beengiven as the court thinks reasonable and a prima facie case for winding up has been established

Contributories and Members

Contributories and members may petition for the winding up of a company upon the grounds set out inSection 213(a)-(g) of the 1963 Act Although all past and present members are prima facie entitled topresent a petition where a contributory is the holder of fully paid up shares the court will be reluctantto allow the application unless it can be shown that the company is solvent and that a substantial surplusof assets will be available to the members as otherwise the member will have no tangible interest in thewinding up

The Director of Corporate Enforcement

The ODCE can petition for the winding up of a company on the grounds set out in Section 12 of the 1990Act The ODCErsquos locus standi arises where the affairs of the company have been investigated by an

141

inspector and it appears from the report of such inspector that the company should be wound up in thepublic interest

The Registrar of Companies

The Registrar of Companies can petition the court to have a company wound up on the grounds set out inSection 213(h) and (i) of the 1963 Act It is extremely rare for the Registrar to petition to have acompany wound up because of his power to instead strike a company off the companies register


No

3 Creditor issues



On application to the High Court to put in place a scheme of arrangement that Court may stay allproceedings or restrain further proceedings against the company for a certain period During suchperiod the rights of unsecured creditors against the company will be restrained

Examinership

During the period of an examinership the company enjoys a ldquostayrdquo during which creditors may notexercise their rights against the company In addition no proceedings of any nature can be commencedagainst the company without prior leave of the High Court and subject to certain limited exceptions anypending proceedings may be stayed Certain specific procedures must be followed vis-agrave-vis guarantorsand the enforcement of guarantees by creditors

Receivership

The appointment of a receiver to a company does not preclude unsecured creditors from enforcing theirrights in respect of the debt owed to them

Creditorsrsquo Voluntary Liquidation

Proceedings and actions against a company are generally not stayed in a voluntary liquidation andunsecured creditors remain free to exercise their rights in this regard However the liquidator of thecompany in voluntary liquidation may apply to the High Court for an order effecting such a stay

Compulsory (Court Liquidation)

No action or proceedings against a company which is the subject of a compulsory liquidation may beproceeded with or commenced without the permission of the High Court



The court is empowered by statute to stay all proceedings or restrain further proceedings against the

142

company however this will not prevent the appointment of a receiver by a secured creditor during theprocess

Examinership

Once a petition for the appointment of an examiner had been presented the rights of creditors to enforcetheir security are severely restricted no action may be taken to realise the whole or any part of acreditorrsquos security except with the consent of the examiner (although regard should be had to theprovisions of the Financial Collateral Arrangements Directive 200247EC) Furthermore the examinerhas the right to use and dispose of a creditorrsquos security

Receivership

The appointment of a receiver to a company does not prevent other secured creditors from enforcingtheir security

Liquidation

Commencement of a court or voluntary liquidation does not prevent a secured creditor from appointing areceiver


The position in Ireland in relation to set-off on insolvency is similar for both personal and corporateinsolvency It is provided by section 284(1) of the 1963 Act In the winding up of an insolvent companythe same rules shall prevail and be observed relating to the respective rights of secured and unsecuredcreditors and to debts provable and to the valuation of annuities and future and contingent liabilities asare in force for the time being under the law of bankruptcy relating to the estates of persons adjudgedbankrupt and all persons who in any such case would be entitled to prove for and receive dividends outof the assets of the company may come in under the winding up and make such claims against thecompany as they respectively are entitled to by virtue of this sectionrdquo

Where set off applies its effect is to disapply the normal principle of pari passu distribution of assets Acreditor who is owed money by the company can avoid proving for that debt where he owes thecompany money Set off in a winding up is not mandatory

In order for debts to be capable of being set off in a liquidation there must be mutuality of debits andcredits between the creditor and the company Accordingly set off can operate only where theobligations to be set off arise between the same parties and in the same right

A creditor must pay any balance owing to the company after the set off to the liquidator or where thecompany still owes him he will have to prove with the companyrsquos other creditors for the balance Thedebt owed by the company may be set off in full This gives the creditor the advantage of making full useof that debt to offset his liability to the company If he does not exercise the set off he faces the prospectof having to pay his debt to the company in full and whilst perhaps receiving only a percentage of thedebt owed by the company to him Any debt which is capable of being proved in a winding up can bethe subject of a set off in a winding up The relevant date for set off is the date on which a resolution ispassed or a court order made to have the company wound up and there must be mutual debts andcredits in existence at that date

By definition the set off clause is not applicable to a solvent winding up nor is it applicable to acompany insolvent at the commencement of the winding up but which subsequently turns out to besolvent

143

There is no provision made in the provisions dealing with voluntary arrangements for set-off and theaccepted view is that the insolvency provisions do not apply to voluntary arrangements or compromisesfor they are expressed to apply only to the winding up of insolvent companies

Similarly insolvency set-off is not applicable to examinerships for there are no winding upproceedings

In relation to receiverships the rules of set-off on insolvency are not applicable until such times as thecompany goes into liquidation Upon a receivership there is an assignment in equity in favour of thedebentureholders of any debt owing to the company and coming within the scope of the charge The rulesrelating to set off on assignments accordingly determine whether there is a valid set off


Section 140 of the 1990 Act allows a court to make an order requiring one company to contribute to thedebts and liabilities of another insolvent ldquorelatedrdquo company in circumstances where the court considersit just and equitable to make such an order

A company is deemed to be ldquorelatedrdquo to another company

(i) where it is its holding companysubsidiary

(ii) where it or its other group companies own more than 50 of the share capital

(iii) where its own members own more than 50 of the share capital

(iv) where it is entitled to exercise or control the exercise of more than 50 of the voting power at anygeneral meeting of the company

(v) where there is another company to which both companies are related or

(vi) where the businesses of the companies have been carried on in such a way that the separatebusiness of each company is not readily identifiable (This last proviso does not however affect thegeneral principle that group companies are recognised to be separate legal entities even where they areinterrelated and interact on a day to day basis For section 140 to be invoked something beyond normalgroup trading is required)

In determining whether it is just and equitable to impose an order the court must consider

(i) the extent to which the related company took part in the management of the insolvent company

(ii) the conduct of the related company towards the creditors of the insolvent company and

(iii) the effect that such an order would have on the creditors of the related company

It is important to note that an order will not be imposed if the only ground for making such order is themere fact that the two companies are related or that the creditors of the insolvent company relied on thefact that another company is was related to the insolvent company

Furthermore no order can be made unless the court is satisfied that the circumstances that gave rise tothe winding up of the company are attributable to the actions or omissions of the related company Itmust therefore be proved that the related company was the cause of the other being wound up

144

Section 141 of the 1990 Act provides that where two or more related companies are being wound upand if a court is satisfied that it is just and equitable to do so both companies may be wound up togetheras if they were one company (a pooling order)

In deciding whether it is just and equitable to make a pooling order a court will have regard (but notexclusively) to

(i) the extent to which any of the companies took part in the management of any of the other companies

(ii) the conduct of any of the companies towards the creditors of any of the other companies

(iii) the extent to which the circumstances that gave rise to the winding-up of any of the companies areattributable to the actions or omissions of any of the other companies and

(iv) the extent to which the business of the companies have been intermingled

Section 141 provides that it is not just and equitable to make a pooling order if the only reason for doingso is

(i) the fact that one company is related to another or that

(ii) the creditors of the company being wound up have relied on the fact that another company is or hasbeen related to the first company

Section 141(3)(c) expressly states that nothing in section 141 or any order made under it shall affect therights of any secured creditor of any company




The directors continue to control the company throughout the process and any effect on the shareholderswill be dictated by the terms of the scheme if approved

Examinership

Unlike liquidations or receivership the directors remain responsible for the day-to-day management ofthe company The principal task of the Examiner is to ldquoexaminerdquo the companyrsquos affairs and formulate acompromise or scheme of arrangement

In practice the Examiner will work closely with the directors to re-assure creditors employees andstaff

Section 9 of the Companies (Amendment) Act 1990 (as amended) provides that the Examiner may applyto the court and if it is just and equitable to do so may make an Order that some of all of the functions orpowers of the directors be transferred to the Examiner Section 9(2) of the Companies (Amendment) Act1990 (as amended) provides that the Court is to have regard to the following matters in making such anOrder

145

(i) that the affairs of the company are being conducted or are likely to be conducted in a manner whichis calculated or likely to prejudice the interests of the company or of its employees or of its creditors asa whole

(ii) that it is expedient for the purpose of preserving the assets of the company or of safeguarding theinterest of the company or its employees or its creditors as a whole that the carrying on of the businessof the company by or the exercise of the powers of its directors and management should be curtailed orregulated in any particular respect

(iii) that the company or its directors have resolved that such an Order should be sought and

(iv) any other matter in relation to the company the courts thinks relevant

Receivership

When a receiver is appointed all the powers of the company and the directors to deal in the assetsaffected by the receivership are suspended All the powers of the receiver and the debenture holder arecontained in the debenture document which is a contractual document save a number of statutoryprovisions A receiver can only deal with assets which have been charged Where the debenture createsa charge over the entire undertaking and business of the company the debenture holder will appoint areceiver to run the affairs of the company in such a manner that the debt due to the debenture holder willbe paid off (and the powers of the companyrsquos directors will be suspended accordingly) Subject to thishowever the appointment of the receiver will not change the status of the company While the directorscease to control the assets over which the receiver has been appointed their normal powers and dutiescontinue in respect of other assets and liabilities of the company (if any)

Where the receiver has been appointed on foot of a floating charge sections 319 and 320 of the 1963Act read in conjunction with each other require the company to provide a statement of affairs to beprovided within fourteen days of receipt of the notice of the receiverrsquos appointment That statement ofaffairs must include particulars of the companyrsquos assets debts and liabilities among other things Thisstatement is required to be verified on Affidavit by current or former officers promoters or an employeewho is capable of giving the information required

Liquidation

Upon the commencement of a membersrsquo voluntary liquidation the directorrsquos powers cease exceptinsofar as the members allow and in a creditorsrsquo voluntary liquidation they cease insofar as thecommittee of inspection (or the creditors if no such committee has been appointed) allow (sections258(2) and 269(3) of the 1963 Act respectively) No such formal divesting of powers from the directorsoccurs in a compulsory liquidation but the practical effect of the vesting of such extensive powers (aslaid out above) in the liquidator is the deprivation of the directors of any role in the operation of thecompany

Effect of Insolvency on the Employment Relationship

The effect of an employers insolvency on the employment relationship will be determined largely by thetype of insolvency situation that arises

Examinership

Two possibilities vis-agrave-vis employees arise

(i) The employment contracts of the companys workforce continue as normal However the examiners

146

proposals may include making a sale of the business or part thereof which might result in redundancies

(ii) Where an order is made under section 9 of the Companies (Amendment) Act 1990 (as amended) (anorder that the functions or powers vested in or exercisable by the directors be performable orexercisable only by the examiner) such an order in effect could constitute a repudiatory breach of thecontracts of employment of those senior employees whose functions are taken over by the examiner

If the business of the company is sold the European Communities (Protection of Employees on Transferof Undertakings) Regulations 2003 (ldquoTUPErdquo) applies

Receivership

Where a Receiver is appointed out-of-court (eg under a debenture) - As the receiver is normallyappointed under a debenture as an agent of the company in receivership his appointment is not generallyviewed as terminating contracts of employment Rather the pre-existing contracts remain operative solong as the receiver continues to employ the workers This employment is viewed as being continued onbehalf of the company Exceptions to this rule exist however such as where the type of work concernedis incompatible with the appointment of a receiver and manager (eg post of managing director)

Where a Receiver is appointed by the High Court - the traditional common law position is that a court-appointed receiver not being an agent of the company is unable to continue to employ employees in thecompany that is in receivership In practice redundancies are effected on the appointment of thereceiver It is rare for a receiver to be appointed by the High Court


Liquidation

Appointment of a Provisional Liquidator

The appointment of a provisional liquidator has no effect on the employees unless the provisionalliquidator is given a specific power by the court to dismiss employees

Court-Ordered Liquidation

(i) Employment ceasing at time winding-up order is made The winding-up order constitutes notice ofimmediate dismissal The effect of this is that the employee has been dismissed and becomes entitled toarrears of salary up to the date the order is made and damages for wrongful dismissal (ie breach of theemployment contract) (in addition to hisher statutory rights to notice pay redundancy etc)

(ii) Employment ceasing after winding-up order is made - The common view is that the making of awinding-up order constitutes an anticipatory repudiatory breach of the contract of employment In somecases however the business of the company will continue for a limited period of time and employeesmay be rehired by the liquidator and continue in employment

If the business of the company is sold TUPE does not apply

Voluntary Liquidations

The crucial distinction between a members voluntary liquidation and a creditors voluntary liquidation isthat a members voluntary liquidation is a solvent liquidation and the obligations towards employeescannot be shirked There can be no recourse to the Social Insurance Fund in a members voluntaryliquidation unlike in a creditors voluntary liquidation scenario

147

Ultimately the impact of a voluntary liquidation on the contract of employment depends on whether theemployee continues to work after the resolution to wind up the company is passed The position has notbeen codified or enunciated in case law and so the legal position is unclear ndash the position is dictated bypractice rather than by settled law

In a voluntary winding-up whether a members or creditors winding up the passing of the resolutionconstitutes a repudiatory breach of the contract of employment entitling the employee to treat thecontract as terminated and him or herself as having been wrongfully dismissed The employee therebybecomes entitled to his contractual entitlements and his statutory entitlements (in relation to notice payredundancy payment etc)


How is the procedure financed


Funded through the companyrsquos own revenue

Examinership

Section 29(2) of the Companies (Amendment) Act 1990 (as amended) provides that the Examinerrsquosfees costs and expenses as sanctioned by the Court shall be paid and the Examiner shall be indemnifiedout of the revenue of the business of the company or the proceeds of realisation of the assets

Where a Scheme of Arrangement is approved and implemented the Examinerrsquos fees costs and expenses(as agreed with the investor and or the company) are usually paid out of the investment monies and thecourt has no involvement However where the company does not exit examinership successfully theExaminerrsquos fees costs and expenses must be paid out of the assets of the company in priority to all otherclaims secured and unsecured

Receivership

The receivers costs and expenses are funded from the realisation of the secured assets TheDebentureholder may also make fee arrangements with the receiver

Liquidation

The members in general meeting set the remuneration of a members voluntary liquidator The committeeof inspection or if there is no such committee the creditors fix the remuneration in a creditorsrsquovoluntary liquidation The remuneration of an Official Liquidator is a matter for the court whosediscretion will be guided by what it considers to be fair As regards the priority of voluntary liquidatorsrsquoremuneration Section 281 of the 1963 Act provides that such is payable out of the assets of the companyin priority to all other claims Section 244 of the 1963 Act applies to official liquidations and providesthat where assets are insufficient to meet liabilities the court may make an order as to payment as itthinks fit In this regard guidance is provided by Order 74 Rule 128(1) of RSC



This will be dependent upon the specific terms of the arrangement Contracts may provide that on theoccurrence of such an event will constitute a breach of the contract or trigger a forfeiture provision

148

Examinership

Repudiation of contracts - Section 7 (5A) of the Companies (Amendment) Act 1990 (as amended)provides that an Examiner shall have no power to repudiate a prepetition contract entered into by thecompany to which he is appointed However a negative pledge clause may be ignored during the periodof protection if the provisions of section 7(5B) and (5C) of the Companies (Amendment) Act 1990 (asamended) are complied with ndash that the Examiner notifies the charge holder that he is of the opinion thatto allow the NPC be enforced would prejudice the survival of the company and the whole or any part ofits undertaking as a going concern

Section 20 of the Companies (Amendment) Act 1990 (as amended) permits the company itself with thecourtrsquos approval to repudiate (or affirm) any contract where the Examiner is to formulate proposals fora compromise or Scheme of Arrangement However for the court to give its approval the contract mustrequire an element of performance other than payment on the part of the company and on the part of theother party parties to it

Disclaimer of contracts - An Examiner may apply to the court to obtain the powers exercisable by anOfficial Liquidator and this would include the power to disclaim onerous property

Receivership

Unless the contract between in question provides for termination of contract on the appointment ofreceiver the contract can be specifically enforced by the receiver as agent of the company The converseof that where the receiver does not enable the company to perform part of its contract (for examplepayment of rent to a landlord) that creditor will merely have a claim for damages against the companywhich is an unsecured claim

Liquidation

The commencement of a liquidation may 1) constitute a breach of contract 2) be an event that frustratesthe contract 3) have been specifically contemplated by the contract or 4) may not affect the contract atall The effect of the commencement of the liquidation will depend entirely upon the terms of thecontract in question

A liquidator may view certain assets as constituting more of a liability than a benefit to a company Insuch circumstances a liquidator might decide that the company is better off without them and may makean application to disclaim them pursuant to section 290 of the 1963 Act Sometimes owning propertyentails being subject to obligations Where such obligations are burdened by onerous covenants thelegislature provides that the Liquidator may disclaim such property Such onerous obligations includethe following unprofitable contracts property which is unsaleable or not readily saleable land of anytenure burdened with onerous covenants and shares or stock in companies




Creditors should notify the company applicant of their claims in writing

149

Examinership

Creditors should notify the examiner of their claims in writing

Receivership

The receiverrsquos main duty is to ensure the repayment of the debt of the secured creditor who appointedhim Preferential creditors should nonetheless notify the company and the receiver of their claims inwriting

Liquidation

Voluntary ndash formal proof of debts is not essential in voluntary liquidations however submissions ofclaims in writing may be required by the liquidator

Compulsory ndash the creditors must prove their debts The liquidator of the court may fix the time by whichwritten proof of debts must be lodged



There is no general rule on ranking of claims and the arrangements agreed will set out the terms ofpayment

Examinership

There are no legal rules governing ranking of claims in an examinership or a scheme of arrangementThe scheme of arrangement will set out the terms of payment

Receivership

Creditors who are ranked in law as having the highest priority are paid first Then if they have not beenpaid already the creditor who appointed the receiver is paid If however the asset being sold wasreserved for the loan in question the money need only be given to the creditor who appointed thereceiver

Liquidation

The order of entitlement to payment in liquidation is as follows-

(i) fees costs and charges of any earlier examiner

(ii) fees costs and charges of liquidation

(iii) claims of preferential creditors

(iv) payment of floating charge holder

(v) payment of unsecured creditors

(vi) members and contributories of the company

The fixed charge holder is entitled to payment out of proceeds of his secured assets Preferential

150

creditors are entitled to payment in full before other creditors are paid The preferential creditors in anIrish liquidation are the Revenue Commissioners local authority rates wages and salaries up to acertain amount and certain sums payable to employees in respect of accidents sickness unfairdismissal redundancies



Yes in the following instances

(i) Informal Scheme of Arrangement - creditors agree to accept just a portion of their debt in full andfinal settlement

(ii) Formal Scheme of Arrangement - if 60 of creditors approve a Scheme of Arrangement then itwill be binding on all creditors Such a scheme can be a useful way to cram down smaller creditors

(iii) Examinership A majority in number and value of that class alone voting in favour of the proposalsis sufficient for the court to confirm the proposals subject to the examiner showing that no other classwould be unfairly prejudiced were the proposals adopted Even if every other class of creditor votesagainst the examinerrsquos proposals unless one such class can successfully challenge the proposals onunfair prejudice grounds they are ultimately subject to cram-down The unfair prejudice test is typicallymet by a showing that the class receives treatment that is at least equivalent to what that class wouldhave received in an alternative insolvency process The only alternative open to an out of the moneyunsecured creditor class is liquidation and the unfair prejudice test can therefore usually be met wherethat class receives even a nominal dividend Banks are frequently opposed to examinerships due to theirlack of control over the process (compared with a receivership) and fear over potential

(iv) cramming down of the secured debt



This procedure will come to an end once the scheme comes into effect The scheme takes effect once acopy of the High Courtrsquos sanction is filed with the CRO

Examinership

Once approved the scheme of arrangement becomes binding on the company and all the memberscreditors and interested parties (whether or not they voted in favour of it) The court will set a date uponwhich the scheme of arrangement becomes effective The date must be no more than 21 days from dateof approval Once all debts have been paid by the company as per the scheme of arrangement and anynecessary finance obtained the protection period ends and the company continues to trade as it didbefore the examinership The Examiner must deliver the court order approving the scheme ofarrangement to the CRO

The High Court may direct that the process cease at an earlier date if the examiner fails to formalise ascheme of arrangement the court refuses to confirm the examinerrsquos proposals or the examination iswithdrawn If the examinership is unsuccessful the company is usually placed in Court Liquidation

151

Receivership

The receiver must file abstracts of herhis receipts and payments in the CRO for each six-month periodfrom the date of herhis appointment and any lesser final period up to the date heshe ceases to act

Receivership may be a temporary measure and it may not lead to the dissolution of the company Once areceiver has been discharged the directors resume their normal functions in respect of all of the affairsof the company (provided no liquidator has been appointed in the interim)

The receiver will be discharged once he has realised the assets over which he has been appointed andthe secured creditor (and any preferential creditors if appropriate) has been paid A notice of ceasing toact must then be filed in the CRO

Upon cessation unless the company is already in liquidation a statement by the receiver is requiredunder section 52 of the Company Law Enforcement Act 2001 to assert whether at the date of cessationthe company was solvent This statement is filed with the final receivers abstract This statement isforwarded by the CRO to the ODCE


The liquidator must account of hisher dealings to the CRO This reporting requirement is not required ifthe winding up continues for a period of less than 12 months

The liquidator will call a final general meeting of the shareholders for the purposes of explaining theaccount of the winding up to them The meeting must be called by advertisement in two dailynewspapers circulating in the district where the registered office of the company is situated Theadvertisement must be published at least 28 days before the meeting Within one week of the holding ofthe final general meeting referred to above the liquidator must send to the Registrar of Companies acopy of the winding up accounts and must notify him of the holding of the meeting

A return of the final winding up meeting must be filed in the CRO and accompanied by a full statement ofaccount spanning the duration of the liquidation

After three months from the date of receipt and registration by the Registrar of these documents thecompany will be deemed to have been dissolved

At least three months will be needed from the date of the directorsrsquo resolution to wind up the companyup until the final shareholdersrsquo meeting at which the liquidator presents an account of the winding upprovided that the liquidation proceeds in a straightforward manner The company is not officiallydissolved for a further period of approximately three months

Creditors Voluntary Liquidation

The liquidator must summon meetings of the members and creditors at the end of each year to give anaccount of hisher acts and dealings and the conduct of the winding up Details of the meeting must bedelivered to the CRO

As soon as the affairs of the company are fully wound up the liquidator must make up an account of thewinding up and call a general meeting of the shareholders and the creditors for the purpose of laying theaccount before the meeting and giving any explanation of it which may be necessary The account mustshow how the winding up has been concluded Each such meeting must be called by advertisement intwo daily newspapers circulating in the district where the registered office or principal place ofbusiness of the company is situated and must specify the time place and object of the meeting and must

152

be published at least 28 days before the meeting The statement of account is also registered with theRegistrar of Companies

A return of the final members and creditors meetings is submitted by the liquidator to the CRO at thecompletion of the liquidation and is accompanied by a full statement of account spanning the duration ofthe liquidation Three months after its registration the company will be deemed dissolved

Compulsory Liquidation

The winding up will conclude once the court order dissolving the company the examiners certificate ifany and the final papers have been lodged with the CRO

When the Court makes an order for the dissolution of a company it may order that the company bedissolved from the date of presentation of the order to the CRO

The dissolution can be voided within 2 years under section 310 of the 1963 Act



Informal Scheme of Arrangement

Informal schemes are done outside the ambit of the courts and are particularly suitable for situationswhere there are a handful of large creditors

A recovery plan including being asked to write off a portion of their debt should be presented tocreditors for their agreement It should be made clear that the continued operation of the company willbe dependent upon all major creditors accepting the recovery plan The recovery plan should clearlyshow how creditors will benefit by supporting it This can be illustrated by demonstrating the returnwhich creditors would receive under a liquidation scenario versus the return they would receive fromsupporting the recovery plan

A major disadvantage of attempting to implement an informal scheme of arrangement is that the companydoes not have court protection Accordingly if a large creditor decides not to support the recovery planthen he can take legal action such as a winding up petition or enforcement of a judgment debt Acompany can however make the scheme binding on all the creditors under section 279 of the 1963 Act

Any arrangement entered into between a company about to be or in the course of being wound up andits creditors shall subject to the right of appeal under this section be binding on the company ifsanctioned by a special resolution and on the creditors if acceded to by three-fourths in number andvalue of the creditors


The term ldquopre-packrdquo can have different meanings in different jurisdictions but its essence is that beforean insolvency process occurs ndash whether that be receivership liquidation or examinership ndash thebuyerinvestor has been identified and the commercial and legal terms negotiated to a conclusionthereby enabling the deal to be completed immediately or closely following the appointment of theinsolvency office holder and without interruption to the trading activity of the target company

153

The usage of pre-pack insolvency sales is less developed in Ireland than in other jurisdictions but therehas been an increasing number of asset sales structured through pre-pack receiverships over the lastnumber of years The most recent successful example was the sale of the A-Wear retail chain by itsreceiver Jim Luby of McStay Luby In July 2011 the Superquinn grocery chain was sold to Musgraves byits receivers Kieran Wallace and Eamonn Richardson of KPMG in what was probably the largest everpre-pack transaction in this market

In Ireland there are no rules or guidelines in general usage The critical standard for the appointedinsolvency office holder is to ensure that he obtains the best price possible for the assets at the time ofsale Provided the insolvency office holder complies with this test and adheres to the highestprofessional standards there is no barrier to effecting a pre-pack sale in a manner which will stand upto scrutiny and which will allay the concerns of creditors



Section 250 of the 1963 Act provides that an order made by a court of any country recognised for thepurposes of that section and made for or in the course of winding up a company may be enforced by theHigh Court in the same manner in all respects as if the order had been made by the High Court itself Theonly country in respect of which the necessary ministerial order has been made for the purpose of thissection is Great Britain and Northern Ireland Section 250 of the 1963 Act has recently been amended sothat it does not apply in relation to an order made by a court of a State to which the EU InsolvencyRegulation applies (outlined below)

As far as restructurings are concerned Section 36 of the Companies (Amendment) Act 1990 providessimilarly that any order made by a court of any country recognised for the purpose of that section andmade for or in the course of reorganisation or reconstruction of a company may be enforced by the HighCourt No recognition order has yet been made under this section

Council Regulation (EU) No 13462000 on Insolvency Proceedings (the lsquoRegulationrsquo) establishes aregime for the improved efficiency and effectiveness of the conduct of cross-border insolvencies Thisis achieved by providing for cross border recognition and enforcement of basic orders such as theappointment of liquidators and other insolvency officer holders and of remedies typically invoked ininsolvency proceedings As a Regulation adopted by the EU Council this measure has force of laweffective from 31 May 2002

The Regulation is expressed to apply to ldquoCollective insolvency proceedings which entail the partial ortotal divestment of a debtor and the appointment of a liquidatorrdquo (Article 1)

The annex to the Regulations stipulates for each jurisdiction the category of proceedings which thisincludes In the case of Ireland these are listed as meaning

(i) compulsory winding up

(ii) bankruptcy

(iii) administration in bankruptcy of the estate of persons dying insolvent

(iv) winding up in bankruptcy of partnerships

154

(v) creditorsrsquo voluntary winding up (with confirmation of a court)

(vi) arrangements under the control of the court which involve the vesting of all or part of the propertyof the debtor in the official assignee for realisation and distribution and

(vii) company examinership

Whilst the Regulation provides for lsquocreditorsrsquo voluntary winding up (with confirmation of a court)rsquo theconcept of voluntary liquidation in Ireland generally means by definition that there has been no courtorder The Corporate Insolvency Regulations (SI 2002333) establish a procedure whereby such aliquidator can apply to have his appointment confirmed by a certificate of the Master of the High Courtthereby bringing it within the scope of the Regulation

The term lsquoliquidatorrsquo is defined as lsquoany person or body whose function is to administer or liquidateassets of which the debtor has been divested or to supervise the administration of his affairsrsquo (Article 2)The Annex lists those persons for each Member State In the case of Ireland it means a

(i) liquidator

(ii) official assignee

(iii) trustee in bankruptcy

(iv) provisional liquidator or

(v) examiner

Receivership is excluded from the Regulation Therefore recognition of such appointments can beproblematic in some EU jurisdictions

The Regulation does not apply to insolvency proceedings concerning insurance undertakings creditinstitutions or collective investment undertakings Insurance undertakings are the subject of a separateDirective 200117EC Credit institutions are subject to Directive 200124EU

155

Israel

Amos Hacmun Partner Heskia - Hacmun Law Firm

wwwhh-lawcoil email mainhh-lawcoil tel 97236081122



Pledge Floating Charge Assignments


Yes Key circumstances checked arms-length consideration collision with pledges other senior rights


Potential Personal liability if overlooking insolvency situation

2 Taking action


Freezing of Proceedings (similar to chapter 11) and Liquidation or Creditors Arrangement


NA


None is friendly but probably receivership is the best for a secured creditor


Insolvency Petition


Shareholders creditors directors can petition but only the court can order the proceedings


The court appoints a liquidator who acts as officer of the court and reports to the court regularlyMaterial decisionsaction are brought to the court for approval


156

1 to 20 years


In Freezing of Proceedings the company may benefit from getting some time to restructure withoutdebtors taking enforcement actions In Liquidation ndash the company may terminate certain agreementswhich are regarded as burdening assets


Yes but without the ability to pay at market price


Yes many


If the company collapsing is big enough to have a politicalpublic impact then there may be a bailout orother intervention

3 Creditor issues


They normally lose their money


Petition to appoint a receiver to sell the asset


It applies but only in respect to existing debts typically creates debates around bank guarantees etc


If a company in liquidation made payments to shareholdersrelated companies prior to its collapse thenthese payments will be checked and may be revoked


No


Only upon petition and order by the court but in practice this isnrsquot really happening there arebondholder committees which serve for the cooperation among similar bondholders


157


Freezing of Proceedings mdash A trustee appointed by the court Liquidation ndash Liquidator appointed by thecourt or a special manager appointed by the court


During liquidation it is financed by its income and assets new activities can only be done if thefinancing is secured In practice secured creditors may allocate a certain finance amount to enable thesale of the assets in an optimal manner in Case of Freezing of Proceedings ndash there is normally aoperation plan that needs to be approved and it includes also the sources of financing


This happens de facto


They do not benefit from it unless they are taken over and the business continues as in such case theirsocial rights may be protected to a certain extent In case of liquidation part of the social rights andsalary have a senior ranking and are also covered by the national security


The company may ask to cancel certain agreements which are considered as a burdening asset



During insolvency debt claims are submitted to the liquidator and they need to include an affidavit andsupporting evidence


Within 6 months from start of the liquidation


When making the claim the creditor has to provide information as to whether he is a secured creditoretc and have it based by evidence The liquidator then determines the ranking of the creditors



Yes


By order of the court approving the creditors arrangement

158

7 International InteractionWhat is the approach of the companyrsquos jurisdiction in respect of recognition of foreign proceedings

There is a certain level of cooperation in the recognition of foreign judgment however the court andliquidation are not subject to foreign proceedings and they are not binding unless so ordered by the localcourt of liquidation

159

Italy

Roberto Tirone Partner Cocuzza amp Associati Studio Legale

wwwcocuzzaeassociatiit email rtironecocuzzaeassociatiit tel 3902866096



Under Italian law security instruments can be granted over various categories of debtorrsquos assets andnamely

(i) over moveable assets financial securities bank accounts cash receivables IP rights through thegranting of a pledge

(ii) existing or future receivables through a security assignment

(iii) over real estate assets through a mortgage instrument

(iv) if the creditor is a bank over the whole of the circulating moveable assets through a floating charge(ldquoprivilegio specialerdquo)


RD 2671942 (hereinafter the ldquoItalian Insolvency Lawrdquo) provides for a number of grounds upon whicha transaction (including the granting of security interests) entered into by a company which is in financialdifficulties can be avoided if the company goes then bankrupt However special rules relating torestructuring arrangements provide for various exemptions to the applicability of the general claw-backregime in order to boost the availability of creditors to enter into such restructuring schemes


Directors might be charged with both civil and criminal liabilities arising from the company continuingto trade while in distress However once again special rules aimed to narrow or exclude both civil andcriminal liabilities have been set out with respect to the transactions entered into by financiallydistressed companies in the context of a restructuring procedure

2 Taking action


Pursuant to Article 5 of the Italian Insolvency Law a company becoming unable to pay its obligationsmust be declared bankrupt and a formal insolvency proceedings (ldquofallimentordquo) must be commenced forthe purposes of liquidating the companyrsquos assets and using the proceeds of the liquidation to pay thecompanyrsquos creditors

160

Before the financial distress becomes irreversible a company may take into consideration the openingof a restructuring proceedings and namely of

(i) a composition with creditors procedure pursuant to Article 160 et seq (ldquoconcordato preventivordquo)or

(ii) a formal restructuring agreement ratified by the Court pursuant to Article 182-bis of the ItalianInsolvency Law (ldquoaccordo di ristrutturazione del debitordquo)

The choice between the two available formal restructuring arrangements is made by the company takinginto account various elements such as for instance the number of creditors and the type of creditors (iefinancial institutions versus commercial suppliers) to be involved in the arrangement the level offinancial distress etc


A company can always execute a restructuring agreement without the opening of a formal procedure infront of the Court In such a scenario exemptions to the claw-back regime and limitations to thedirectorsrsquo liabilities can apply provided that the restructuring agreement is entered into by the companyin accordance with Article 673(d) of the Italian Insolvency Law (ie the restructuring agreement isbased on a report issued by a certified accountant who matches certain requirements provided for by theItalian Insolvency Law)



The insolvency proceedings (ldquofallimentordquo) is solely meant to safeguard the creditorsrsquo rights in asituation where the company ceases to exist as a corporate entity


In general terms and based on the different degree of involvement of the Court and on the majority ofcreditors necessary for the approval of the restructuring arrangement the composition with creditorsprocedure (ldquoconcordato preventivordquo) can be labelled as a more creditor-friendly restructuringprocedure compared with the formal restructuring agreement (ldquoaccordo di ristrutturazione del debitordquo)which presents more debtor-friendly features

Informal restructuring agreement

Indubitably an informal restructuring agreement which matches the requirements set out by Article673(d) of the Italian insolvency law can present very favourable features from the debtorrsquos standpoint


Pursuant to Article 5 of the Italian Insolvency Law a company becoming unable to pay its obligationsmust be declared bankrupt and a formal insolvency proceedings (ldquofallimentordquo) must be commenced


With respect to both insolvency proceedings (ldquofallimentordquo) and formal restructuring arrangements awritten request must be filed with the Court which has authority over the area where the company has its

161

registered office



The company (acting through its directors) each creditor and the public prosecutor are entitled to file apetition for the commencing of an insolvency proceedings (ldquofallimentordquo)


With respect to the formal restructuring arrangements an application can be filed by the company (actingthrough its directors)



In the context of an insolvency proceedings (ldquofallimentordquo) the Court involvement is massive being thewhole proceedings monitored and directed by the Court in cooperation with the receivership


Also the composition with creditors procedure (ldquoconcordato preventivordquo) provides for an extensiveinvolvement of the Court whilst with respect to the execution of a formal restructuring agreement(ldquoaccordo di ristrutturazione del debitordquo) the role of the Court is basically limited to check whether allthe requirements provided for the approval of the agreement by the Court have been duly fulfilled



The length of an insolvency proceedings (ldquofallimentordquo) can vary to a great extent in reason of the numberof creditors the amount of the debts to be repaid the nature of the companyrsquos assets to be sold by thereceivership in some cases it can take several years for the insolvency proceedings (ldquofallimentordquo) tobe accomplished


With respect to the composition with creditors procedure (ldquoconcordato preventivordquo) a six to ten monthperiod from the date of filing of the request with the Court is usually necessary for the agreement amongthe company and the creditor to be reached and approved by the Court


The procedure for the approval by the Court of a formal restructuring agreement (ldquoaccordo diristrutturazione del debitordquo) ndash unless an opposition is filed by a creditor ndash usually takes a one to sixmonth period from the date of filing of the request with the Court



162

The insolvency proceedings (ldquofallimentordquo) formally commences with the Court issuing a decisionstating that the company went bankrupt which has to be served (by a Court officer) to the company and tothe creditors who filed the insolvency petition to the receiver and to the public prosecutor Thedecision is then published on the Companyrsquos Register


The decision approving the composition with creditors is published on the Companies Register


The arrangement is published on the Companies Register



In the context of an insolvency proceedings (ldquofallimentordquo) the company basically ceases to be boundupon by the contracts entered into previously and no creditor can start enforcement proceedings againstthe company


The access to the formal restructuring arrangements restrain the creditors from starting enforcementproceedings for sixty days from the publication of the restructuring agreement (or subject to the Courtgiving its consent from the registration of the proposal of restructuring agreement) with the relevantCompanies Register

A further benefit the company as debtor can enjoy by acceding to a composition with creditorsprocedure (ldquoconcordato preventivordquo) is represented by the chance to request the Court to be entitled toterminate or suspend the execution of contracts binding upon the company (Article 169-bis of the ItalianInsolvency Law)


No


No


In the context of insolvency or restructuring proceedings involving big corporations unions and politicalbodies could try to influence the outcomes of the proceedings in order to avoid the negative impact onthe regionrsquoscountryrsquos economy arising from the company getting bankrupt

3 Creditor issues


163

In the context of an insolvency proceedings (ldquofallimentordquo) unsecured creditors rank below securedcreditors thus their chances to recover their debts is low if not in some cases minimal

With respect to the restructuring arrangements in terms of market practice secured creditors are oftensatisfied in full but depending on factual circumstances they can also asked to write off part of theirdebts


Even if the enforcement of security instruments is banned in the context of an insolvency proceedings(ldquofallimentordquo) secured creditors rank above other creditors with respect to the liquidation of theproceeds of the sale of the assets over which the relevant security interests were granted


Set-off rules apply to the insolvency proceedings (fallimentordquo) with respect to the debts owed by acreditor to the company prior the commencing of the proceedings


No


No


Yes a creditor committee is established in the insolvency proceedings (fallimentordquo) and its role is tomonitor the liquidation process




The receiver controls the company


The board of directors and the shareholders continue to control the company under the supervision of anadministrator appointed by the Court


The board of directors and the shareholders continue to control the company


Claims for the repayments of funds granted in order to allow the implementation of the composition withcreditors procedure (ldquoconcordato preventivordquo) or a formal restructuring agreement (ldquoaccordo diristrutturazionerdquo) rank among the first-tier claims Furthermore the claw-back regime does not apply to

164

financings granted in the context of restructuring arrangements


No


In the context of an insolvency proceedings (ldquofallimentordquo) claims for the repayments of rank among thefirst-tier claims

In general special pieces of legislation provide for social security schemes purported to reduce theeconomic damages for employees of financially distressed companies



Depending on the nature of the contract either the contract automatically ceases to be effective upon thecommencing of the proceedings or the receiver is entitled to decide whether to terminate or to keep inforce the contract entered into by the company


Pursuant to Article 169-bis of the Italian Insolvency Law the company is entitled to require the Court toterminate or suspend the contracts binding upon the company


The proceedings does not affect contracts binding upon the company




Creditors have to file a petition with the Court


The commissioner after having examined the companyrsquos account books convenes a creditors meetingfor them to vote about the proposal of composition Creditors who are not convened are entitled to file apetition challenging the approval of the composition by the Court


Creditors are entitled to file an opposition to the approval by the Court of the restructuring arrangementwithin 30 days from the publication of the latter on the Companiesrsquo Register


165


At least 30 days before the first hearing scheduled by the Court for the examination of the companyrsquosliabilities


At least 30 days before the first hearing scheduled by the Court for the approval of the composition bythe Court


Within 30 days from the publication of the restructuring arrangement on the Companies Register


In the context of an insolvency proceedings (ldquofallimentordquo) claims rank as follows

(i) claims labelled as first tier claims (ldquocrediti prededucibilirdquo) by the applicable laws (as those owedby creditors of the receivership such as lawyers acting in favour of the receiver accountants etc butalso those arising from the financing of restructuring arrangements)

(ii) claims arising from secured or privileged debts (such as those of the employees)

(iii) claims arising from unsecured debts

Please note that a very articulated and quite cumbersome ranking among the claims in the three mainclasses is provided for by the Italian Insolvency Law and by special pieces of legislation


No



No



Insolvency proceedings can conclude in two different ways

(ii) an insolvency composition with creditors (ldquoconcordato fallimentarerdquo) is approved by the Court andfully implemented in such a scenario the company is entitled to run the business again

(ii) following the liquidation of the companyrsquos assets a decision of the Court formally concludes theinsolvency proceedings (ldquofallimentordquo) if as usually happens the companyrsquos net equity is negative thecompany is winded up

166


Following the issuance by the Court of the decision approving the composition or the formalrestructuring agreement the procedure can be deemed successfully completed once the relevantrestructuring plan has been duly fulfilled by the company


In the context of the composition with creditors procedure (ldquoconcordato preventivordquo) and of the formalrestructuring agreement (ldquoaccordo di ristrutturazione del debitordquo) creditor classes can be created



See Paragraph 22 above


No



European insolvency laws apply to Italian companies


European insolvency proceedings are automatically recognized in Italy pursuant to the Europeaninsolvency laws With respect to proceedings in extra-EU jurisdiction the recognition of decisionsissued by foreign courts is usually ruled by international conventions ratified by Italy in the lack of anapplicable international convention ratified by Italy the rules set out by the Italian civil procedure codeand by other special pieces of legislation for to the recognition of foreign decisions apply also for thecase of decisions relating to insolvency proceedings

167

Korea

Jae Hoon Kim Partner Eunjai Lee Partner LEE amp KO

wwwleekocom email jhkleekocom lejleekocom tel 8227724440 8227724240



Under Korean law a creditor may obtain security interest over real property personal property claimsand other rights (for instance stocks and bonds) by agreement with the owner of such assets The mostcommon form of security is mortgage in case of real property and pledge in case of personal propertyclaims and other rights

It is also possible for the owner of assets to transfer the title of such assets to the creditor for securitypurposes


Transactions entered into whilst the company is in financial difficulties may be subject to cancellation oravoidance

(i) Creditorrsquos right of cancellation

Under the Civil Code where (a) a debtor company engages in a legal act (including contracts) thatprejudices its creditors (eg the debtor companyrsquos assets are reduced due to such act) (b) the debtorcompanyrsquos liabilities exceed its assets prior to or as a result of such act and (c) the debtor company andthe beneficiary of such act are aware of the prejudice to the creditors then creditors have a right to seekcancellation of such act and return of benefits

This right can be exercised by the creditors where the debtor company is not in a rehabilitation orbankruptcy procedure and is not available once either of such procedures is commenced

(ii) Right of avoidance

Under the Debtor Rehabilitation and Bankruptcy Act (ldquoActrdquo) the trustee in a bankruptcy procedure orreceiver in a rehabilitation procedure may avoid the following acts

(a) Any act of the debtor company with the knowledge that it would prejudice creditors Prejudiceincludes not only a reduction of assets but also a preferential treatment

(b) Any act of the debtor company taking place after a ldquosuspension of paymentrdquo (which refers to thedebtorrsquos explicit or implicit admission that due to the lack of financial resources it cannot pay itsliabilities continuously as they become due) or an application for commencement of a bankruptcy orrehabilitation procedure (collectively the ldquoTriggering Eventrdquo) that (i) creates a security interest in thedebtor company (ii) discharges any obligation of the debtor company or (iii) is otherwise prejudicial tocreditors

168

(c) Any act of the debtor company taking place after or within 60 days before a Triggering Event that (i)creates a security interest in the debtor company or (ii) discharges any obligation of the debtorcompany where the debtor company is not obligated to give rise to such creation or discharge

(d) Any gratuitous act (for example a grant of a gift) of the debtor company taking place after or withinsix (6) months before a Triggering Event

If the transaction was with a person having a certain special relationship with the debtor company asdefined by the Act (eg its director) then a more relaxed standard for avoidance applies


A director does not become liable merely for continuing to trade whilst the company is in financialdifficulties unless he or she has violated his or her fiduciary duty in relation to a particular transactionDirectorrsquos duties remain the same in financial difficulties as in normal state In case of a violation offiduciary duty the director may be held liable for civil damages andor even be subject to a criminalcharge The director may also be subject to a shareholderrsquos derivative suit

2 Taking action


The Act provides for (1) a rehabilitation procedure the purpose of which is to assist the debtorcompanyrsquos rehabilitation and (2) a bankruptcy procedure the purpose of which is to assist the debtorcompanyrsquos orderly liquidation


Financial institutions as creditors can invoke a work-out programme for a debtor company under theCorporate Restructuring Promotion Act (ldquoCRPArdquo) which provides for work-out programmes for certainfinancially troubled companies The CRPA was originally enacted in 2001 and was effective until 2005The CRPA was re-introduced twice between 2007 and 2013 The CRPA has been re-introduced again asof January 2014 and is effective until 2015 To initiate a work-out programme the debtor companysmain creditor bank notifies the debtor company as a ldquocompany showing signs of potential defaultrdquo Thedebtor company then makes an application to the main creditor bank for commencement of a work-outprogramme Upon receipt of such application the main creditor bank calls for a meeting among financialinstitutions that have extended credit to the debtor company (ldquoCommissionrdquo) When the meeting iscalled the Governor of the Financial Supervisory Service can ask the applicable financial institutionsnot to exercise their rights against the debtor company until the meeting of the Commission is convenedAt such meeting the Commission may decide that the applicable financial institutions should stay anyexercise of their rights against the debtor company for up to four (4) months The Commission thenenters into a restructuring agreement with the debtor company The restructuring agreement provides foramong others how the debtor company will recover from its financial difficulties and how the terms andconditions of credit agreements with the applicable financial institutions will be adjusted If (1) theCommission cannot agree on the stay (2) the restructuring agreement is not finalized during the stay (3)the debtor company does not implement the restructuring agreement or (4) the debtor company wishes tostop the work-out programme then the work-out programme would be discontinued All Commissiondecisions must be made on the basis of affirmative votes of the applicable financial institutionsrepresenting at least 75 of the aggregate amount of the credit extended to the debtor company and anydecision on the adjustment of the terms and conditions of credit agreements additionally requiresaffirmative votes of at least 75 of all secured claims

169

For companies that are not covered by the CRPA financial institutions may prepare various work-outagreements that are similar to those under the CRPA

Which procedures are creditor-friendlydebtor friendly

In general a rehabilitation procedure tends to be more debtor-friendly in that it allows the debtorcompany to continue its business while retaining flexibility in terms of managing and adjusting its debtobligations towards the creditors via a rehabilitation plan A bankruptcy procedure does not favour anyparticular group as its purpose is merely to liquidate and distribute the residual assets of the debtorcompany in an orderly manner A work-out programme tends to be more creditor-friendly in that itallows the creditors to take practical control of the process in a manner that addresses their needs orinterests


An application for commencement of a rehabilitation procedure under the Act may be filed by the debtorcompany if (1) it is unable to pay its debts as they become due without causing a significant impedimentto the continuation of its business or (2) there is a danger that the debtor company will becomeinsolvent Certain parties other than the debtor company may file an application for commencement of arehabilitation procedure if there is a danger that the debtor company will become insolvent

An application for commencement of a bankruptcy procedure can be filed if a debtor company isinsolvent The test for insolvency under the Act is the inability to pay liabilities when due If there is aldquosuspension of paymentrdquo (which refers to the debtors explicit or implicit admission that due to the lackof financial resources it cannot pay its liabilities continuously as they become due) the debtor companyis presumed to be unable to make payments as they become due An example is a clearing housessuspension of transactions with the debtor company (ie the debtor company issues a note and the partyto whom the note is issued presents it to the clearing house for settlement but the debtor company failsto make payment under the note) If the debtor company is a legal entity (excluding companies that are ofpartnership-like types) another basis for insolvency is excess of liabilities over assets


The process for filing for a rehabilitation procedure involves preparation and submission of anapplication for commencement of a rehabilitation procedure together with certain prescribedinformation and documents The applicant should pay for the costs of a rehabilitation procedure inadvance If the applicant is a party other than the debtor company the costs paid by the applicant will bereimbursed by the debtor company as common interest claim Upon filing the court will review theapplication and make certain investigations including interview with the representative of the debtorcompany and decide whether or not to commence a rehabilitation procedure

The process for filing for a bankruptcy procedure involves preparation and submission of an applicationfor commencement of a bankruptcy procedure together with certain prescribed information anddocuments The applicant should pay for the costs of a bankruptcy procedure in advance If the applicantis a party other than the debtor company the costs paid by the applicant will be reimbursed by thedebtor company as estate claim Upon filing the court will review the application and make certaininvestigations including interview with the representative of the debtor company and decide whether ornot to commence a bankruptcy procedure


An application for commencement of a rehabilitation procedure may be filed by the debtor company Ifthe debtor company is a corporation or limited liability company the application may be filed by (i)

170

creditors with claims equivalent to 10 or more of the total amount of issued equity interests of thedebtor company at par value or (ii) equity holders with 10 or more of the total amount of issued equityinterests of the debtor company at par value If the debtor company is not a corporation or limitedliability company the application may instead be filed by (i) creditors with claims equivalent to FiftyMillion Korean Won (KRW 50000000) or more or (ii) equity holders with 10 or more of the totalamount of issued equity interests of the debtor company at par value

An application for commencement of a bankruptcy procedure may be filed by the debtor company itsdirector member with unlimited liability or liquidator or a creditor


Both rehabilitation procedure and bankruptcy procedure accompany close supervision and control of thecourt The commencement and conclusion of both procedures as well as all material decisionspertaining to each step of the procedures are subject to the courtrsquos approval


The court will decide within one (1) month whether or not to commence a rehabilitation procedureAfter commencement claims are filed and a rehabilitation plan is usually submitted by the receiver Therehabilitation plan will be reviewed at the second meeting of the interested parties consisting ofcreditors and shareholdersequity holders and will be put to vote at the third meeting of the interestedparties The Act provides that the required consents from the interested parties with respect to arehabilitation plan should be obtained within one (1) year (which is extendable for a further term of six(6) months) from the commencement of the rehabilitation procedure In ordinary cases it usually takesabout eight (8) to twelve (12) months before the court approves a rehabilitation plan

For a bankruptcy procedure it is difficult to generalize how long the procedure as a whole will takeGenerally a bankruptcy procedure will commences within (a) one (1) month if the filing party is eitherthe debtor company or a creditor but no objection is raised by the debtor company or (b) three (3)months if the filing party is a creditor and the debtor company raises an objection

What other steps such as notice are require

The Act has no provision for automatic stay Thus it is necessary to protect the debtor company duringthe interim period between the filing and the court decision for commencement of a rehabilitation orbankruptcy procedure In this regard the Act provides that when an application for commencement of arehabilitation procedure is filed the court may issue certain temporary orders including acomprehensive preservation order imposing general restrictions on creditors ability to enforce theirclaims against the debtor company

Likewise the Act provides that when an application for commencement of a bankruptcy procedure isfiled the court may issue certain temporary orders With respect to a bankruptcy procedure howeversuch orders are rarely issued in practice Further unlike in a rehabilitation procedure no comprehensivepreservation order is available


Once a rehabilitation procedure is commenced creditorsrsquo claims are stayed except for common interestclaims and certain claims approved by the court and will be adjusted by and repaid under therehabilitation plan

Once a bankruptcy procedure is commenced creditorsrsquo claims are stayed except for secured claims and

171

estate claims and will receive distributions


An arrangement similar to a debtor in possession is only available in case of a rehabilitation procedureIn a rehabilitation procedure the existing representative of the debtor company (usually therepresentative director) will serve as the receiver absent special circumstances namely (1) where therepresentative has engaged in acts that caused financial difficulties (2) where the creditor committeerequests for appointment of a different person with reasonable basis or (3) where appointment of adifferent person is otherwise necessary for rehabilitation


There are no local law red-flags generally applicable to a situation However there are some industry-specific laws For example the Banking Act and other laws are applied with respect to insolvency ofbanks


Generally no political factors come into play during a rehabilitation or bankruptcy procedure under theAct

3 Creditor issues


In a rehabilitation procedure unsecured creditorsrsquo claims are stayed unless they are qualified ascommon interest claims or have obtained court approval and will be adjusted by and repaid under therehabilitation plan

In a bankruptcy procedure unsecured creditorsrsquo claims are stayed unless they are qualified as estateclaims and will receive distributions


In a rehabilitation procedure as in the case of unsecured creditorsrsquo claims secured creditorsrsquo claims arestayed unless they are qualified as common interest claims or have obtained court approval and will beadjusted by and repaid under the rehabilitation plan

In a bankruptcy procedure a secured creditor may freely enforce its security


In general creditors may set off their claims against their obligations towards the debtor companywithout court approval in both rehabilitation and bankruptcy procedures provided that set-off in arehabilitation procedure is permitted only within a designated period for filing of claims while there isno such time limitation in a bankruptcy procedure and provided further that set-off is not available (1)where the creditorrsquos obligation is accrued after commencement of a rehabilitation or bankruptcyprocedure or (2) where the creditorrsquos obligation is accrued with knowledge that a Triggering Event hasoccurred except where the obligation is founded on a cause (a) that is provided by law (b) thatoccurred before the creditor became aware of the Triggering Event or (c) that occurred one (1) year orlonger before the commencement of a rehabilitation or bankruptcy procedure (3) where the creditorrsquos

172

claim against the debtor company is acquired from a third party after the commencement of arehabilitation or bankruptcy procedure or (4) where the creditorrsquos claim against the debtor company isacquired from a third party with knowledge that a Triggering Event has occurred except where theclaim is founded on a cause (a) that is provided by law (b) that occurred before the creditor becameaware of the Triggering Event or (c) that occurred one (1) year or longer before the commencement of arehabilitation or bankruptcy procedure


In a rehabilitation procedure the Act provides that certain claims arising out transactions between thedebtor company and a person having a certain special relationship with the debtor company as definedby the Act including its affiliates may be treated less favourably in the rehabilitation plan There is nocomparable provision with respect to a bankruptcy procedure under the Act


No such recourse is available


A creditor committee will be established when an application for commencement of a rehabilitation orbankruptcy procedure is filed If the debtor is a natural person or small-to-medium company it may notbe established The creditor committeersquos main role is to express opinions on material matters (egappointment or removal of the receiver or trustee) during the applicable procedure



In a rehabilitation procedure a receiver who is the existing representative of the debtor company orsuch other person appointed by the court controls and decides on the debtor companys business affairssubject to the courts approval for all material decisions

In case of a bankruptcy procedure a trustee appointed by the court has control over the bankruptcyestate subject to the courts approval for all material decisions

How is the company financed 4-3 Is it possible to arrange DIP funding (or similar)

In a rehabilitation procedure a receiver can borrow monies with the courts approval The lendersclaim for repayment of the borrowed monies is a common interest claim having priority over any othercommon interest claims except for secured common interest claims

In case of a bankruptcy procedure a trustee can borrow monies with the courts approval Howeversuch a financing rarely takes place in a bankruptcy procedure A claim for repayment of monies soborrowed is an estate claim However unlike in a rehabilitation procedure no super-priority is grantedto such an estate claim


In case of a rehabilitation procedure the collective agreement with employees is not an executorycontract and the debtor company may not terminate an employee on grounds of commencement of arehabilitation procedure Further any wages severance allowance and certain other monetary

173

obligations of the debtor company towards employees are classified as common interest claims

In case of a bankruptcy procedure on the other hand the trustee terminates all employees immediatelyupon commencement of a bankruptcy procedure The trustee may separately hire the necessary personnelto assist him or her usually from among the terminated employees As in the case for rehabilitation anywage severance allowance and certain other monetary obligations of the debtor company towardsemployees are classified as estate claims


In case of a rehabilitation procedure if there is any contract entered into by the debtor company but notperformed before commencement of the procedure and the unperformed obligations of the debtorcompany and its counterparty are in a relationship of mutual consideration then the receiver has anoption to terminate the contract The counterparty to the contract may send a notice to the receiverdemanding a decision of whether to perform or terminate the contract and the receiver is deemed tohave elected to perform if such decision is not notified to the counterparty within thirty (30) daysfollowing receipt of the counterpartyrsquos notice If the receiver elects to perform then the debtorcompanyrsquos obligations under the contract become common interest claims If termination is elected theclaim for damages arising out of the termination becomes a rehabilitation claim The Act provides forcertain modifications and exceptions to this rule with respect to certain types of contracts (eg financialcontracts lease contracts utility supply contracts)

In case of a bankruptcy procedure the trustee has a similar option as the receiver in a rehabilitationprocedure One of the differences is the effect of the trusteersquos failure to notify its decision to thecounterparty Unlike in a rehabilitation procedure a failure to respond in a bankruptcy procedure isdeemed to be an election to terminate



In a rehabilitation procedure the receiver should prepare and submit to the court a list of claims againstthe debtor company Creditors will need to file their claims with the court if their claims are not listedA prescribed form is used for claim filing Creditorsrsquo claims so listed or filed are subject to review bythe receiver the debtor company and other creditors and shareholdersequity holders In case anyobjection is raised against a creditorrsquos claim after such review the creditor must bring a lawsuit forconfirmation of claim within one (1) month against all the parties who raised objections

In a bankruptcy procedure creditors should file their claims with the court A prescribed form is usedfor claim filing The claims so filed are subject to review by the trustee the debtor company and othercreditors In case any objection is raised against a creditorrsquos claim after such review the creditor mustbring a lawsuit for confirmation of claim within one (1) month against all the parties who raisedobjections


In a rehabilitation procedure even if a creditor files its claim after the designated filing period the courtpractically allows claims to be filed on or before the close of the second meeting of the interestedparties (which meeting is held for review of rehabilitation plan)

In a bankruptcy procedure a creditor may file its claim at any time after the designated filing period

174

However a creditor should take caution so as not to lose the opportunity to participate in distribution ofbankruptcy estate by late filing


In a rehabilitation procedure there are four types of claims

(i) Common interest claims These are claims specifically recognized under the Act mostly forexpenses and costs necessary for implementing the rehabilitation procedure Most common interestclaims arise after the commencement of the rehabilitation procedure However certain claims arisingbefore the commencement of the rehabilitation procedure including employees wages and certain taxesare also classified as common interest claims Common interest claims must be satisfied as they becomedue without being subject to the rehabilitation procedure

(ii) Rehabilitation secured claims These are rehabilitation claims that are secured by the debtorsproperty as of the commencement of the rehabilitation procedure An example is a loan secured by amortgage

(iii) Rehabilitation claims These are claims against the debtor arising out of causes that took placebefore the commencement of the rehabilitation procedure but they are not secured

(iv) Shareholder claimsequity holder claims

These claims except for common interest claims are paid in accordance with the schedule under arehabilitation plan provided that certain rehabilitation claims and rehabilitation secured claims may bepaid in advance upon court approval These claims may be adjusted by the rehabilitation plan in wholeor in part

A relative priority rule is adopted in a rehabilitation plan (as opposed to an absolute priority rule)Under a relative priority rule instead of recognizing a strict priority creditors with rehabilitationsecured claims creditors with rehabilitation claims and shareholdersequity holders are accordeddifferent treatment based on fair and equitable principles For example creditors with rehabilitationclaims may receive some distribution even if creditors with rehabilitation secured claims are not paid infull

In a bankruptcy procedure a secured creditor can exercise rights with respect to its security interest atany time independently of the bankruptcy procedure The order of priority among other creditors is asfollows

(i) Estate claims These are claims specifically recognized under the Act mostly for expenses and costsnecessary for implementing the bankruptcy procedure Most estate claims arise after the commencementof the bankruptcy procedure However certain claims arising before the commencement of thebankruptcy procedure including employees wages and certain taxes are also classified as estateclaims Estate claims must be satisfied as they become due without being subject to the bankruptcyprocedure

(ii) Bankruptcy claims These are claims against the debtor arising out of causes that took place beforethe commencement of the bankruptcy but they are not secured

(iii) Subordinated bankruptcy claims These are certain claims designated as subordinated bankruptcyclaims including interests damages accrued after the commencement of the bankruptcy proceedingpenalties and fines Creditors with subordinated bankruptcy claims can only participate in distributionsonce all ordinary bankruptcy claims are satisfied in full

175


With respect to filing of claims there are no particularly complex issues other than as already explainedabove



A procedure similar to ldquocram-downrdquo exists in case of a rehabilitation procedure

With respect to a duly submitted rehabilitation plan the third meeting of interested parties is calledwhere each class of interested party votes on the rehabilitation plan The court can approve therehabilitation plan if the required consents are obtained from every class The required consents are asfollows

(i) Class of creditors with rehabilitation secured claims The consent of the creditors holding at least75 (in the case of a rehabilitation plan for continuation of business) or 80 (in the case of arehabilitation plan for liquidation) of the total claim amount of the class is required

(ii) Class of creditors with rehabilitation claims The consent of the creditors holding at least two-thirds of the total claim amount of the class is required

(iii) Class of shareholdersequity holders At least 50 of the voting rights of the class is required Novoting rights are granted to shareholdersequity holders if the debtor companys liabilities exceed itsassets when the rehabilitation procedure is commenced

If the rehabilitation plan is not consented to by one or more classes and the consent of at least one classis obtained the court may approve the rehabilitation plan with certain modifications designed to givefair and equitable protections to the class(es) that did not consent


After the courtrsquos approval of a rehabilitation plan if the rehabilitation plan can be implemented withoutdifficulty the court may conclude the rehabilitation procedure and the debtor recovers its normal statusPlease note that even after the court approves the rehabilitation plan the debtor and the receivercontinue to be subject to court supervision and approval until the conclusion of the rehabilitationprocedure On the other hand if it becomes clear that the debtor cannot implement the rehabilitationplan the court will terminate the rehabilitation procedure and a bankruptcy procedure is commencedagainst the debtor

In a bankruptcy procedure once the final distributions to creditors have been made following theliquidation of the bankruptcy estate a meeting of creditors is convened to make a report on settlement ofthe accounts After the meeting the court decides that the bankruptcy procedure is concluded


In most cases creditor classes consist of two groups namely (i) secured creditors (ie those withrehabilitation secured claims) and (ii) unsecured creditors (ie those with rehabilitation claims) thoughit is possible to classify creditors into three or more classes

176


Are there non-formal procedure available to the company

Please refer to our response in 2-2 above regarding a work-out programme


In case of rehabilitation the Act provides for an early submission of a rehabilitation plan That iscreditors holding 50 or more of the claims against the debtor company are entitled to submit arehabilitation plan at any time after commencement of the rehabilitation procedure Early submission ofa rehabilitation plan has the effect of abridging preparation of the rehabilitation plan and is useful forearly MampA of the debtor company However early submission does not change most of proceduralrequirements such as filing of claims interested parties meeting and so on In this sense itseffectiveness is somewhat limited



The Act basically adopted the Model Law on Cross-Border Insolvency drafted by the UNCITRAL in1997 with certain modifications and provides for recognition and assistance of foreign insolvencyproceedings

Please note that recognition of discharge in a foreign insolvency proceeding is not covered byrecognition and assistance under the Act Instead a foreign courtrsquos decision of discharge in theinsolvency proceeding may be recognized as a judgment of a foreign court based on general rules ofcivil procedure

What is the approach of the companys jurisdiction in respect of foreign proceedings

Recognition and assistance will be granted to a foreign insolvency proceeding whether it is a foreignmain proceeding or a foreign non-main proceeding pending in a state where the debtor company has aplace of business office or domicile

177

Latvia

Vita Liberte Partner Law Firm VARUL

wwwvarulcomen email vitalibertevarulcom tel +371 6722 2237



A pledge right may be established under a contract or a will or by a court ruling If there is reason tobelieve that execution of a court ruling on the matter may become difficult or impossible the court orjudge may take a decision to secure the claim The claim will be secured by entering an interdictory notein the relevant movable property register or any other public register However in practice the securityestablished by court ruling is rather temporary such as in the course of securing claim in the litigationthe assets in the civil process may be used as a means of security The subject matter of a pledge may beall property whose alienation is not specifically prohibited not only existing but also future propertyand both tangible (movable or immovable) and intangible

The key objective of a pledge right is to entitle the creditor to sell the pledge if the debtor defaults on hisobligations Under Latvian law a pledge is valid either on the basis of possession (when it is deliveredto the pledgee) or on the basis of public credibility (when encumbrance notice is entered only in apublic register)

Latvian law prescribes various forms of security as follows

(i) Mortgage on real property and ships

(ii) Possessory pledge on tangible and intangible property

(iii) Commercial pledge on tangible and intangible property

(iv) Chattel mortgage on ships

(v) Usufructuary pledge and

(vi) Financial collateral

Under the Commercial Pledge Law land vehicles vessels aircraft animals and a registered herd maybe encumbered The debtor may pledge all or some of the property of the company or farm The ownerretains his property right ie transactions do not transfer legal title A property is encumbered with theindication that it has been pledged so that the property cannot be freely acquired

Cash in a bank account cannot be the subject matter of a commercial pledge but it may be pledged asfinancial collateral Intangible property also may be pledged Hence under the Commercial Law sharesmay be pledged on the basis of commercial pledge regulations if the articles of association do notprohibit the encumbering of shares A trade mark can be pledged as well according to Law on TradeMarks and Geographical Indications

178

Latvia operates multiple registers such as the Commercial Pledge Register Land Register VesselRegister Movable Property Register Herd Register State Trade Mark Registry Register of Enterprisesand Vehicle Register where encumbrance may be registered A completed form and appropriatedocuments are required to register a pledge according to its type The holder of the register records theapplications received in order of receipt indicating the date of receipt and the sequence numberassigned Therefore the timing of registration is vital where a particular property is to be encumbered inthe same register In that case the ldquofirst-to-filerdquo rule applies This rule ensures credibility and operateson the presumption that an entry is correct unless the other party proves to the contrary and validarguments must be supplied if the decision of the registry officials is to be reversed

Despite the lack of registration in a public register the transaction is binding between the partiesTherefore third parties having acted in good faith may claim damage if the transaction has harmed theirinterests as a result of failure to register or notify in any other way


Validity of a transaction may be challenged on general Civil Law bases

According to the Insolvency Law the administrator of the insolvent company has the duty to evaluate thedebtorrsquos transactions and bring an action to court regarding the recognition of the respective transactionas invalid regardless of the type of transaction if it has been concluded

(i) following the day of the proclamation of the insolvency proceedings of a legal person or threemonths prior to the day of the proclamation of the insolvency proceedings of a legal person and therebylosses have been caused to the debtor regardless of whether the person with whom or for whose benefitthe transaction has been concluded knew or did not know of the losses caused to the creditors


The administrator has also the duty to bring an action to court regarding the recognition of the giftagreement of the property of a debtor as invalid

The Insolvency Law provides that a pledge contract is recognised as invalid if the pledge rights havebeen founded after the proclamation of the insolvency proceedings of the debtor

The administrator has the duty to bring an action to court regarding the appeal or discharge of atransaction also against the heirs of the transaction participants

In accordance with the Commercial Law creditors of a company who cannot gain satisfaction for theirclaim against the company may bring an action for the benefit of the company against the followingpersons who have incurred losses for the company but have not compensated them

(i) founders of the company

(ii) persons who has facilitated the malicious or negligent actions of the founders

(iii) persons who in bad faith persuades a member of the board of directors or the council a proctor ora person with a commercial power of attorney to act against the interests of the company or itsshareholders

(iv) members of the board of directors and council

179

Creditors of a company have the right to bring an action within five years from the date when the right tosuch claim was created and this right is not restricted also in the cases if the company has withdrawn itsaction against the person at fault a settlement has been entered into or the losses have occurred in thefulfilment of a decision of the meeting of shareholders or the council


A board member may face civil administrative and criminal liability

According to the Latvian Administrative Violations Code if the debtor fails to submit an insolvencyapplication with the court in the cases specified by the Law a fine and or restriction to hold certainpositions in commercial entities may be imposed on the member of the board of directors

In accordance with the Commercial Law the members of the board of directors and council aresolidarily liable for losses that they have caused to the company A claim for compensation for damagemay be filed by a company in case if members of the board (council) did not act as would an honest andcareful manager

In addition creditors of a company who cannot gain satisfaction for their claim against the company maybring an action for the benefit of the company against the members of the board of directors and councilwho have incurred losses for the company but have not compensated them A board member may causedamages by action and by inaction

A board member may be criminally liable for action or inaction done while he was holding positions ofthe member of the board of the company and in case if competent authorities prove that he or she isguilty of committing a criminal offence intentionally or through negligence has committed an offencewhich is set out in the Criminal Law For example a board member may be liable for arbitrarinessevasion of tax payments and payments equivalent thereto fraud misappropriation etc

The Criminal Law provides criminal liability for a person who commits driving a legal person intoinsolvency if substantial harm is caused thereby to the rights and interests protected by law of anotherperson

Criminal liability is stipulated by the Criminal Law for a person who commits submitting suchapplication for insolvency wherein false information has been provided or there has been concealmentof information if due to the application the insolvency proceedings may be announced or was announced(knowingly untrue insolvency proceedings application)

For a person who commits impeding the course of insolvency proceedings which conduct is manifestedby the representative of the debtor (legal person the subject of the insolvency proceedings) or of anatural person (natural person of the insolvency proceedings) in evading taking part in adjudication ofthe matter or failing to provide or concealing the information requested by the meetings of creditors ofthe legal person the subject of the insolvency proceedings the court or the administrator illegalalienation of property concealing property or transactions non-transference concealing destroying orforging documents or in other intentional acts which delay the course of the insolvency proceedings TheCriminal Law provides criminal liability

2 Taking action


180

In Latvia there are several proceedings aimed at solving financial difficulties of an undertaking

(i) Reorganization proceedings which are regulated by the Commercial Law It is optimal and efficientmechanism of creation or conversion of the legal entity A commercial company may be reorganized byway of merging division or restructuring

(ii) Legal protection proceedings which are regulated by the Insolvency Law It is an aggregate ofmeasures of a legal nature whose purpose is to renew the ability of a debtor to settle their debtobligations if a debtor has come into financial difficulties or expects to do so

(iii) Liquidation proceedings

If the company has enough assets to cover all creditor claims liquidation procedure is applicable It isregulated by the Commercial Law Liquidation is a process of termination of business during which theliquidator recovers debts sells companyrsquos assets and satisfy the claims of creditors

If assets of the company are not enough to cover all of the creditor claims bankruptcy procedure (a partof insolvency proceeding) is applicable It is regulated by the Insolvency Law The insolvencyproceedings of a legal person are an aggregate of measures of a legal nature within the scope of whichthe claims of creditors are settled from the property of a debtor in order to promote the honouring of thedebtorrsquos obligations


The debtor and the creditor is entitled to agree on settling the debts following by the general regulationstipulated in the Civil Law of Latvia


More importance is attached to the protection of the debtoracutes interests in reorganization proceedings ofan undertaking and in legal protection proceedings than in insolvency proceedings For example courtdecision regarding the initiation of a matter of legal protection proceedings has the following effects

(i) a stay of the enforcement of judgments in matters regarding that adjudged and the recovery of theamount not yet recovered and in matters regarding the honouring of obligations through the court inaccordance with the procedure specified in the Civil Procedure Law

(ii) a prohibition for the secured creditor to request the sale of the pledged property of the debtor

(iii) a prohibition for the creditor to submit an application for the insolvency proceedings of a legalperson

(iv) the suspension of the penalty and of the late charge increment etc

Insolvency procedure is considered as more focused on protecting creditors due to the aim of thebankruptcy procedure ndash to sell all of the debtorrsquos property and the funds acquired from the sale shift forsettling the claims of creditors


Insolvency proceedings of a legal person is applied in respect of a legal person partnership individualmerchant or a person registered in a foreign country who performs permanent economic activities inLatvia Insolvency proceedings are applied to a debtor if any of the following features of the insolvency

181

proceedings exists

(i) it has not been possible to execute the court adjudication regarding the recovery of debt from thedebtor

(ii) the debtor has not honoured one or more debt obligations from which the basic debt exceedsamount stipulated by the Insolvency Law and whose deadline has expired and the creditor have issuedor sent a warning to the debtor regarding their intention to submit an application for the insolvencyproceedings

(iii) the debtor has not paid an employee the work remuneration in full compensation for damages inconnection with an accident at work or an occupational disease or has not carried out the mandatorysocial insurance payments within two months following the day specified for payment

(iv) the debtor is unable to honour the debt obligations whose deadline has expired

(v) in accordance with the initial financial report of liquidation the debtor has insufficient assets tosatisfy all the justified claims of the creditors or this condition is discovered during the course ofliquidation

(vi) if a matter of legal protection proceedings has been initiated in respect of a debtor for the secondtime in a year but the implementation of the legal protection proceedings has not been proclaimed

(vii) when implementing the legal protection proceedings a debtor has not performed the activitiesspecified in the Insolvency Law or has provided false information

(viii) a debtor has not implemented the plan of measures of the legal protection proceedings for morethan 30 days and has not submitted the amendments to this plan to court or

(ix) the debtor violates the restrictions of action during legal protection proceedings

(x) if the debtor is unable to honour the obligations specified in the plan of measures of the legalprotection proceedings


In order to start an insolvency proceeding of a legal person an application for insolvency proceedinghave to be submitted with a court where the company has its registered seat Registered seat may bedetermined from the Commercial Registers of Register of Enterprises whose mission is to perform theregistration of legal entities and keeping of the relevant registers

An application for insolvency proceeding must contain the name of the court the firm name registrationnumber and legal address of the creditor and debtor as well as the element of insolvency proceedingsmust be indicated in the application The document proving the payment of the State fee and other courtcosts as well as the document proving the payment of the insolvency proceedings deposit must beattached to application In compliance with the chosen element of insolvency proceedings documentscertifying the reasonableness of chosen element have to be appended to application

For example submitting an application for insolvency proceedings in compliance with the insolvencyelement of impossibility to execute the court adjudication regarding the recovery of debt the creditorhave to append to the application evidence regarding substantiation and amount of the claim as well as astatement issued by the bailiff regarding impossibility to recover the debt from the debtor

182

In order to start a legal protection proceeding a debtor submits with a court where the company has itsregistered seat an application for legal protection proceeding The name of the court the firm nameregistration number and legal address of a debtor have to be indicated in the application Debtor has toindicate non-existence of restrictions specified by the Insolvency Law for initiation of a legal protectionproceeding as well as indicate whether during a year a matter regarding legal protection proceedingshas been initiated in respect of a debtor but implementation of legal protection proceedings has not beenannounced Documents confirming the payment of the State fee and other court costs and conditions bywhich the application is justified have to be appended to the application

After the initiation of a matter of legal protection proceedings in the court a debtor formulates a plan ofmeasures of the legal protection proceedings which is co-ordinated with the creditors and submitted forapproval to court The task of the plan is to ensure that the gain of the creditors not having co-ordinatedthe plan by implementing the legal protection proceedings is at least as large as that if the insolvencyproceedings of a debtor were proclaimed at the moment of the approval of such a plan The followingdocuments have to be appended to the plan of measures of legal protection proceedings

(i) a report on the forecast of proposed cash flow during the first year of the proceedings explaining theitems of the report in the interval of one month while for the subsequent years in the interval of threemonths

(ii) the objections submitted by creditors and not taken into account in respect of the plan of measuresof the legal protection proceedings

(iii) the opinion of the administrator

The Insolvency Law provides also extrajudicial legal protection proceedings where comparing to thelegal protection proceeding the debtor has formulated a plan of measures before commencement of amatter and submits it to a court together with an application for the initiation of a matter of extrajudiciallegal protection proceeding


An application for the insolvency proceedings of a legal person may be submitted to the court where thecompany has its registered legal address by a creditor or creditors a debtor or an administrator Theinsolvency proceedings of a legal person may be commenced by the liquidator of the main proceedings(Article 29(a) of Council Regulation No 13462000) and the proceeding is adjudicated by the courtaccording the location of the main interest centre of the debtor

Comparing to insolvency proceedings only based on debtorrsquos application the court initiates matter oflegal protection proceedings


Both insolvency and legal protection proceedings are effected as judicial proceedings

Courts exercise supervision over the lawfulness of insolvency and legal protection proceedings andperform other duties provided by laws Courts decide on the commencement of proceedings andapproval of plan of measures of legal protection proceedings appointment and discharge of anadministrator and termination of both proceedings (no matter what the basis for termination) confirmamendments to the plan for measures of legal protection proceedings Courts settle all kinds of disputesparticularly disputes related to defending claims but also actions for recovering assets Courts approvestatements of auction submitted by an administrator within insolvency proceedings In addition a courtexercises general supervision over the activities of an administrator

183


The length of an insolvency proceeding depends on the complexity of the case and whether the partieschallenge court rulings made during the proceedings and how the process of defending claims goes As arule bankruptcy proceedings last a year or two However it is not unusual for complex bankruptcyproceedings involving court cases to last for more than two years

The time period for the implementation of legal protection proceedings should not exceed two yearsfrom the day of the coming into effect of the court adjudication Mentioned time period may be extendedby additional two years if the majority of the creditors agree thereto


If the debtor (legal entity) has not honoured one or more debt obligations from which the basic debtamount separately or in total exceeds the amount stipulated by the Insolvency Law and whose deadlinehas expired before submitting an application for insolvency proceedings creditor or creditors have toissue or sent a warning paid by the sender to the legal address of the debtor regarding their intention tosubmit an application for the insolvency proceedings of a legal person and the debtor has not paid theirdebt or raised justified objections to the claim within three weeks following the handing over of thewarning to the postal merchant

If it is impossible to execute the court adjudication regarding the recovery of debt the creditor have toappend to the application regarding commencement of insolvency proceedings a statement issued by thebailiff regarding impossibility to recover the debt from the debtor

If employee of the debtor is submitting an application for insolvency proceedings heshe have to appendto the application a statement issued by the employer regarding the amount of work remuneration andmandatory social insurance payments

If an application for insolvency proceedings is submitted by the debtor evidence that the participants(members) of the commercial company members of the society or other founders or participants of alegal person are informed regarding submission of the application for insolvency proceedings(commonly a letter) and evidence regarding the right of representation (commonly a statement issued bythe Register of Enterprises) have to be append to the application

In submitting an application for the commencement of insolvency proceedings specified in Article 3(2)of Council Regulation No 13462000 a debtor shall append a certification regarding the location ofmain interest centre of the debtor to the application for insolvency proceedings


Before the courtsrsquo decision regarding proclamation of insolvency proceedings the debtor has a right tofile an application for insolvency proceedings object to the application for insolvency proceedings ofthe creditor and participate in the hearing Debtor may request the prosecutor general to submit a protestto the Senate of the Supreme Court regarding a court adjudication that has come into effect hence a courtjudgment regarding proclamation of insolvency proceedings may not be appealed

After the proclamation of insolvency proceedings of a legal person administrator obtain all the rightsduties and responsibilities of administrative bodies provided for in regulatory enactments the articles ofassociation of the debtor or in contracts and heshe alone is representing the interests of the debtorHowever the administrator appoints a representative of the debtor (a member of an executive authoritythe head of a supervisory body) whose participation at the insolvency proceedings is mandatory

184

The representative of a debtor has the following rights

(i) to become acquainted with the claims submitted by creditors and to express the objections againstthem to the administrator

(ii) to request and receive information about the sale of the property of the debtor

(iii) to participate in the creditorsrsquo meeting and become acquainted with the minutes thereof

(iv) to request that the administrator convenes a creditorsrsquo meeting in accordance with the procedurespecified in this Law

(v) to formulate the plan of measures of the legal protection proceedings and

(vi) to lodge a complaint regarding the decision of the creditorsrsquo meeting or the administrator or bringan action to court in accordance with the procedure specified in this Law


After the proclamation of insolvency proceedings of a legal person the debtor loses the right to act withall its property as well as with the property of third persons that is possessed or held by the debtor andsuch a right are acquired by the administrator

In legal protection proceedings however the undertaking continue its economic activities and retaincontrol over its assets and the right to dispose of assets remains with the management of the undertakingor members of a body substituting it Notwithstanding if a debtor performs transaction which exceedamount indicated in the plan of measures of the legal protection proceedings this transaction must be co-ordinated with the administrator The court decision regarding the initiation of a matter of legalprotection proceedings has the effect of a prohibition to perform the liquidation of a debtor andprohibition to perform transactions which are not provided in the plan of measures of the legalprotection proceedings (for example alienation of the real estate if allowed only if it is provided in theplan of measures)


In relation to insolvency proceedings it is important to note that creditors are required to notify theadministrator of all their claims against the debtor which arose before the proclamation of insolvencyproceedings regardless of the basis or the due dates for fulfilment of the claims no later than within onemonth from the day when the entry has been made in the Insolvency Register (publicly accessibleregister) regarding the proclamation of the insolvency proceedings of the debtor

If a creditor has missed the deadline for submitting a claim he may submit claim against the debtorwithin a deadline not exceeding six months from the day when the entry has been made in the InsolvencyRegister but not later than until the day when the plan for settling the creditorsrsquo claims has beenformulated In that case the creditor in question will be included in the Register of Creditorsrsquo Claimshowever this creditor shall not be granted voting rights in the Creditorsrsquo Meetings After deadlinementioned above the creditor will lose his or her creditor status and his or her rights to claim against thedebtor

Important to note that during legal protection proceedings it is prohibited for the secured creditor torequest the sale of the pledged property of the debtor except if the prohibition causes significant harm tothe interests of this creditor (including the existence of the threat of the destruction of the pledgedproperty or the value of the pledged property has reduced significantly) as well as it is prohibited for

185

the creditor to submit an application for the insolvency proceedings of a legal person


No

3 Creditor issues

are unsecured creditors affected

In insolvency proceedings creditorsacute claims not secured by a pledge will be satisfied after the claims ofpledgees have been satisfied In reality their claims are usually either entirely unsatisfied or satisfied toa small extent However only unsecured creditors are granted with voting rights in a Creditorsrsquo Meeting

If the amount of received money of selling the pledged property does not cover the claims of the securedcreditors in full amount the administrator grant the relevant creditors with the status of unsecuredcreditor for the part of the claim not covered and grant with voting rights in a Creditorsrsquo Meeting

The interests of unsecured creditors are better protected in legal protection proceedings than ininsolvency proceedings The plan of measures of legal protection proceedings within the scope of thecreditorsrsquo group and each type of the claim of the creditors may only anticipate the proportionalrepayment or reduction of the basic debt penalty or interest As well as the plan of measures of legalprotection proceedings may provide the postponement of the honouring of payment obligations and orallow the obligation to be performed in installments In case the legal protection proceedings aresuccessful unsecured creditorsrsquo claims are still satisfied to a larger extent than in insolvencyproceedings

The real problem is that debtors often are not able to execute the plan of measures of legal protectionproceedings which is why it often changes into insolvency proceedings and the end result is the same forcreditors whose claim is not secured by a pledge ndash their claims are either entirely unsatisfied or aresatisfied to a very small extent


According to Insolvency Law within insolvency proceedings the sale of the pledged property of thedebtor is taking place in public auctions if the secured creditor has not agreed with the administrator onthe sale of property without an auction By agreeing with the secured creditor on the sale of pledgedproperty the administrator shall ensure that this property is sold for as high price as possible taking intoaccount the interests of unsecured creditors

Besides a secured creditor may request the sale of the pledged property of a debtor in the legalprotection proceedings if prohibition of sale causes significant harm to the interests of this creditor(including the existence of the threat of the destruction of the pledged property or the value of thepledged property has reduced significantly) The decision to permit the sale of the pledged property of adebtor is taken by the court where the legal protection proceedings have been initiated

The plan of measures of legal protection proceedings have to be anticipated the procedure by which theobligations of the debtor against the secured creditor arising from the contract shall be honoured and theregular payments arising from the contract

The Insolvency Law provides that expenditure arising if the pledged property included in the plan of

186

measures of legal protection proceedings is damaged or the value thereof is reduced is the expenditureof insolvency proceedings in the amount of the value of the pledged property of the claim of the securedcreditor or the reduction thereof


A set-off in the insolvency proceedings of a legal person is permitted if the mutual claims of the debtorand creditor have arisen at least six months prior to the proclamation of the insolvency proceedings of alegal person

In the legal protection proceedings the set-off is permitted if the right to claim of the debtor against thecreditor has arisen at least three months prior to the court decision regarding the initiation of the matterof legal protection proceedings


No


No


The Insolvency Law in force do not provide establishment of creditor committee



The administrator leads the debtor in insolvency proceedings and organizes continuation of the businessactivities of the debtor Administrator has the rights and duties of a board member Within two monthsfrom the day of the proclamation of the insolvency proceedings the administrator compiles a plan forthe sale of the debtorrsquos property where the continuing of the business may be provided Theadministrator send the plan to all creditors the debtorrsquos representative and the guarantor (if such exist)and within 15 days from the sending of the plan the creditor and debtorrsquos representative have the right toobject to the administratorrsquos proposal for the method of sale of the non-pledged property of the debtorthe cession of the claims offered and the planned costs of the insolvency proceedings of a legal person

After the initiation of a matter of legal protection proceedings a debtor have to formulate a plan ofmeasures of the legal protection proceedings which have to be co-ordinated with the creditors andapproved by the court The administrator is providing the supervision of the legal protectionproceedings and is providing an opinion regarding the plan of measures The debtor is implementing theplan of measures of legal protection proceedings

In order to ensure the supervision of legal protection proceedings and insolvency proceedings theInsolvency Administration controls the administratorrsquos activities as well as examine complaints aboutthe administratorrsquos actions except the cases when complaints about the administratorrsquos decisions areexamined by the court in which the respective matter was initiated


187

According to the Insolvency Law the expenditure of legal protection proceedings are covered from thedebtors funds

The costs of insolvency proceedings of a legal person are covered from the debtorrsquos property If it isimpossible the costs are covered from the deposit for the insolvency proceedings of a legal personwhich is paid to the administrator as the costs of the insolvency proceedings If it is impossible to coverthe costs of the insolvency proceedings from the debtorrsquos property they may be financed from the fundsof the debtorrsquos representative the administrator creditor creditor groups or other natural person orlegal person and upon the initiative thereof by the persons referred to agreeing thereto in writing withthe administrator if such agreement conforms to the creditorsrsquo interests


Latvia does not have DIP funding However there are no legal obstructions for insolvent company totake a loan within insolvency proceedings The main issue is whether creditor will want to grant a loanto already insolvent company The obligation to return the loan is deemed to be a consolidatedobligation on a general basis


The methods applied in the legal protection proceedings (such us the postponement of the honouring ofpayment obligations) may be applicable to the claims of an employee for work remuneration if theemployee concerned agrees thereto Proportional reduction of claims for work remuneration ofemployees is not applicable if the relevant consent of employee has not been received The status ofcreditor is not applicable to an employee of a debtor in legal protection proceedings The salaries of thedebtorrsquos employees are included in the expenditure of legal protection proceedings and are coveredaccording to the plan of measures of the legal protection proceedings

If debtor has not paid an employee the work remuneration in full compensation for damages inconnection with an accident at work or an occupational disease or has not carried out the mandatorysocial insurance payments within two months following the day specified for payment it is a reason foremployee who has or who has had employment legal relationships with debtor to start insolvencyproceeding of the employer (legal entity) However if the legal protection proceedings is started it isprohibited for creditor (also employee) to submit to court petition to start insolvency procedure of thedebtor

Creditorsrsquo claims of employees against a debtor have to be submitted to the administrator within onemonth from the day when the entry has been made in the Insolvency register regarding the proclamationof the insolvency proceedings of the debtor The administrator take the decision regarding therecognition non-recognition or partial recognition of the creditorrsquos claim of a debtorrsquos employee within15 days following the receipt of this claim Administrator is responsible to submit to the InsolvencyAdministration an application regarding the settling of the claims of employees from the resources of theguarantee fund for employee claims The following claims of employees shall be satisfied from theresources of the employee claims guarantee fund

(i) work remuneration

(ii) reimbursement for annual paid leave

(iii) reimbursement for other types of paid leave

(iv) severance pay in connection with the termination of an employment legal relationship

188

(v) reimbursement for injury in connection with an accident at work or an occupational disease

Claims in respect of such State social insurance mandatory contributions and personal income taxpayments which are associated with the payments referred above also are satisfied from the resourcesof the employee claims guarantee fund

According to the Insolvency Law the employeesrsquo claims are settled from the debtorsrsquo assets aftercovering in full the costs of the insolvency proceedings of a legal person and the claim of the InsolvencyAdministration if the claims of the debtorrsquos employees are settled from the resources of the guaranteefund for employeesrsquo claims The remaining funds of the debtor are divided for the settlement of theremaining claims of non-secured creditors

During insolvency process administrator is entitled to hire and dismiss from work employees includingthose who were employed before the day of the proclamation of the insolvency proceedings of a legalperson

The Insolvency Law states that the Insolvency Administration as a State authority within the scope of thecompetence protects employeesrsquo interests in case of the insolvency of the employer thereof


If the contract entered into by the debtor has not been executed or has been partially executed on the dayof the proclamation of the insolvency proceedings of a legal person the administrator is entitled torequest the execution from the other contracting party or to unilaterally withdraw from the contract Theadministrator has the right to execute the contract if such action does not reduce the debtorrsquos assets Ifthe administrator unilaterally withdraws from the execution of the contract the other contracting partyhas the right to submit his or her creditorrsquos claim

The continuation of the execution of contracts which have not been terminated as well as the executionof the contracts which have been entered into by the administrator on behalf of the debtor with thirdpersons during the insolvency proceedings of a legal person are financed from the debtorrsquos funds

According to the Insolvency Law after proclamation of the insolvency proceedings of the debtor theadministrator has the duty to evaluate the debtorrsquos transactions and bring an action to court regarding therecognition of the respective transaction as invalid regardless of the type of transaction if it has beenconcluded

(i) after or three months prior to the day of the proclamation of the insolvency proceedings of a legalperson and thereby losses have been caused to the debtor


In addition the administrator has the duty to bring an action to court regarding the recognition of the giftagreement of the property of a debtor as invalid

The amounts of money which the debtor has paid for covering the debt within the six months prior to theday of the proclamation of the insolvency proceedings of a legal person as well as after the day of theproclamation of the insolvency proceedings of a legal person (except the amounts of money which theadministrator has paid during the insolvency proceedings of a legal person) must be repaid if at leastone of the conditions stipulated in the Insolvency Law is established

189



The administrator is notified of a claim by a written petition submitted to the administrator The proof ofclaim must set out the content basis and amount of the claim separately referring to the amount of themain claim and the amount of the ancillary claim and whether the claim is secured by a pledgeDocuments proving the circumstances specified in the proof of claim shall be annexed thereto


Creditorsrsquo claims against a debtor shall be submitted to the administrator within one month from the daywhen the entry has been made in the Insolvency Register regarding the proclamation of the insolvencyproceedings of the debtor

If a creditor has missed the deadline for submitting a claim he may submit claim against the debtorwithin a deadline not exceeding six months from the day when the entry has been made in the InsolvencyRegister regarding the proclamation of the insolvency proceedings but not later than until the day whenthe plan for settling the creditorsrsquo claims has been formulated In that case creditor in question will beincluded in the Register of Creditorsrsquo Claims however heshe will not be granted voting rights Afterthis deadline the creditor will lose creditor status and rights to claim against the debtor


The administrator divides the submitted claims of creditors into two groups- claims of secured creditorsand claims of non-secured creditors


No



There are no cram-down procedures stipulated in the Insolvency Law

However the Insolvency Law is providing reorganization of debtor (legal entity) as one of methodsapplied in legal protection proceedings It is applicable only if anticipated in the plan of measures of thelegal protection proceedings The plan of measures of the legal protection proceedings is coordinatedwith creditors and approved by the court Prior to the approval of the court the administrator preparesan opinion regarding such a plan Creditors do not have the right to request security during the processof reorganisation of a debtor

In addition the Insolvency Law is providing transition of an insolvency proceedings in to legalprotection proceedings excepted cases where the court proclaim the insolvency proceedings of a legalperson due to the fact that debtor has not performed required activities of the legal protectionproceedings or did not implement the plan of measures of the legal protection proceedings

190


Insolvency proceedings terminate by restoring solvency of the debtor (for example in case the debtorhas settled all the obligations thereof) the liquidation of the undertaking or with the court adjudicationfor the implementation of the debtorrsquos legal protection proceedings

Insolvency proceedings usually have a liquidating nature Rehabilitation of an undertaking is very rareand mostly it may be achieved by transition of an insolvency proceedings in to legal protectionproceedings

After implementation of administratorrsquos plan for the sale of the debtorrsquos property and the plan forsettling the claims of creditors or after preparation of the report regarding the non-existence of thedebtorrsquos property the administrator submits an application to court for the termination of the insolvencyproceedings of a legal person appending documents which prove the facts mentioned in the applicationThe application sets out information concerning the insolvency process as a whole and particularly themoney received from the sale of debtorrsquos property thereof payments activities of the administratoraccepted claims of creditors expenses and other circumstances relevant to the insolvency proceedingsOnly court may take a decision on termination of insolvency proceedings of a legal person The Registerof Enterprises takes decision on the exclusion of the debtor from the respective register upon receipt ofa State Archive statement regarding the transfer of debtorrsquos documents for storage

Ideally the legal protection proceedings terminate after successful implementation of the plan ofmeasures of the legal protection proceedings by restoring of debtorrsquos solvency A court take a decisionupon receipt of an application of the debtor on termination of legal protection proceedings A writtenopinion of the administrator regarding implementation of the plan for measures of legal protectionproceedings must be appended to the application A court send immediately a true copy of the decisionon termination of legal protection proceedings to the submitter of the application the administrator aswell as the Register of Enterprises that makes entries in the Insolvency Register

A court take a decision upon its one initiative on termination of legal protection proceedings in the caseif

(i) the majority of creditors have not supported the plan of measures of the legal protectionproceedings

(ii) the plan of measures of the legal protection proceedings does not comply with the requirements ofthe Insolvency Law

Legal protection proceedings may be terminated also by proclamation of insolvency proceedings of alegal person In accordance with the Insolvency Law an administrator has the duty to submit anapplication to court for the insolvency proceedings of a legal person concurrently requesting thetermination of legal protection proceedings if

(i) when implementing the legal protection proceedings a debtor has not performed the activitiesspecified in the Insolvency Law or has provided false information

(ii) a debtor has not implemented the plan of measures of the legal protection proceedings for more than30 days and has not submitted the amendments to this plan to court or

(iii) the debtor violates the restrictions of action specified in this Law


191

There is no official statistics regarding the effectiveness of insolvency proceedings But the commonpractice shows that only secured creditors obtain partial reimbursement of claims



A company has the possibility to negotiate privately with the creditors

In some cases a debtor may resolve financial difficulties via reorganization process without startinginsolvency or legal protection proceedings The Commercial Law provides that a company may bereorganized by way of merging division or restructuring Companies involved in the reorganizationprocess may be companies of the same type or various types

If two or more already existing companies are involved in the reorganization process they enter into areorganization agreement where is indicated the information regarding companies involved their sharesexchange coefficient and the amount of premium the division of the capital shares among theshareholders of the acquiring company the provisions for the transfer of the capital shares of theacquiring company to the shareholders of the companies to be acquired divided or restructured etcMentioned agreement is one of the main documents of the reorganization process where restructuring ofdebts also may be provided

Each of the companies involved in the reorganization process submit a notice of reorganization with thedraft agreement appended to the Register of Enterprises and afterwards the information regardingreorganization is promulgated in the newspaper Latvijas Vēstnesis

Each of the companies involved in the reorganization process prepare a reorganization prospectus Ameeting of shareholders of each of the companies involved takes a decision regarding reorganization Inorder to protect creditor interests within fifteen days from the day of taking of mentioned decision eachof the companies inform in writing all of its creditors as well as publish in the official newspaperLatvijas Vēstnesis a notice that a decision on reorganization has been taken

A reorganization is considered as being in effect from the time when recordings have been made in theCommercial Register regarding all the companies involved in the reorganization process


No





If the center of the main interests of a company (COMI) within the meaning of recitals 12 and 13 of thepreamble to Regulation 13462000 is in a EU member state (except Denmark) the insolvency

192

proceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

Secondary insolvency proceedings commenced by a court of another member state are recognized incase Latvian company has its establishment in that state within the meaning of Article 2(h) of theRegulation 13462000

If a decision on declaration of bankruptcy with respect to an Latvian company is made in Denmark orsome other country that is not a member of the EU the decision will be recognized pursuant to theLatvian Civil Procedure Law As a rule a foreign court decision will be recognized in Latvia exceptthe following cases

(i) the foreign court which made the adjudication was not competent in accordance with Latvian lawto adjudicate the dispute or such dispute is an exception jurisdiction of the Latvian courts

(ii) the adjudication of the foreign court has not come into lawful effect

(iii) the defendant was denied a possibility of defending his or her rights especially if the defendantwho has not participated in the adjudication of the matter was not in a timely and proper manner notifiedregarding appearing in court except if the defendant has not appealed such adjudication even though heor she had the possibility to do so

(iv) the adjudication of the foreign court is not compatible with a court adjudication already madeearlier and entered into lawful effect in Latvia in the same dispute between the same parties or withalready earlier commenced court proceedings between the same parties in a Latvian court

(v) the adjudication of the foreign court is not compatible with such already earlier made and enteredinto lawful effect adjudication of another foreign court in the same dispute between the same partieswhich may be recognised or is already recognised in Latvia

(vi) the recognition of the adjudication of the foreign court is in conflict with the public structure ofLatvia or

(vii) in the making the adjudication of the foreign court the law of such state was not applied as shouldhave been applied in conformity with Latvian international private law conflict of law norms

193

Lithuania

Robert Juodka Partner Varul

wwwvarulcomen email robertjuodkavarulcom tel +370 5 248 7337

At the beginning of the questionnaire it shall be noted that in the Republic of Lithuania two types ofprocedures regarding solvency issues of the enterprises exist bankruptcy procedure and restructuringprocedure (both procedures are hereinafter jointly referred to as the insolvency proceedings)Insolvency proceedings shall be considered as a set of measures in order to settle the financial issuesand satisfy interests of creditors Financial difficulties are related to financial state of a company(debtor) when it fails to fulfil undertaken obligations due to the lack of assets However theseprocedures shall be applied under different circumstances and final results of these procedures is likelyto be different

Insolvency proceedings may be invoked when financial difficulties of a debtor resemble the onesindicated in the Law on Enterprise Bankruptcy of the Republic of Lithuania andor in the Law onRestructuring of Enterprises of the Republic of Lithuania

Activities of specific legal entities are regulated by certain legal acts which cover some aspects ofinsolvency proceedings of such legal entities id est the Law on Financial Institutions the Law onBanks the Law on Insurance the Law on Markets in Financial Instruments the Law on the GuaranteeFund and other legal acts of the Republic of Lithuania may be applicable Main objective of these legalacts is not to regulate bankruptcy proceedings of the mentioned legal entities but to establish specificprovisions indicating exemptions or specifics of bankruptcy proceedings compared to the EnterpriseBankruptcy Law




In order to take security over his assets creditor of the company shall be in compliance with thefollowing conditions established in the Lithuanian Law on Restructuring of Enterprises (hereinafter ndashthe Law on Restructuring) and in the Law on Enterprise Bankruptcy of the Republic of Lithuania(hereinafter ndash the Enterprise Bankruptcy Law)

minus the enterprise has acquired a status of an enterprise under restructuring or bankruptcy

minus the creditor shall within a time period prescribed by the court forward his claims accompanied bythe documents substantiating them and shall also specify how the enterprise has secured the discharge ofthese claims

minus claims submitted by the creditor shall be approved by the court

Only after approval by the court of the creditorrsquos claim the creditor is entitled to take security over hisassets under the procedure established in the Law on Restructuring and in the Enterprise BankruptcyLaw Two types may be distinguished on how a creditor may secure his assets during insolvency

194

proceedings

a) creditorrsquos active participation in the implementation of insolvency proceedings

b) statutory security over creditorrsquos claim

a) Active participation of a creditor in the insolvency proceedings shall be considered as realization bythe creditor of his rights which are granted to him by law and if any actions will be taken by the creditorthese rights will be deemed realized Non-use of such rights does not suspend or violate insolvencyproceedings For example the Law on Restructuring provides that a meeting of creditors1 approves arestructuring plan2 of the enterprise in both insolvency proceedings creditors may ask the insolvencyadministrator or competent bodies of the company for information about how the insolvency proceedingsare implemented and how the interests of creditors are granted and take respective measures to stopactivities which violate interests of creditors thereof3 Therefore the creditors of an enterprise arevested with the power to influence insolvency proceedings by actively participating in theseproceedings

b) The statutory security over creditorrsquos claim is established in the Law on Restructuring and theEnterprise Bankruptcy Law and shall be considered as a procedure of creditorrsquos claim satisfactionsequence whereby one type of creditors have priority before another This sequence cannot be changedand shall be as it is established in the above laws The statutory procedure establishes a sequence andorder of satisfaction of the creditorsrsquo claims obtained from the sale of the assets of the enterprise or bytransferring the assets and shall be as described herein below



The creditorrsquos claims secured by pledge andor mortgage shall be satisfied first of all from the proceedsobtained from the sale of the pledged assets of the enterprise or by transferring the pledged assetsWhere the pledged assets are sold at a price higher than the amount of claims secured by the pledgeandor mortgage the remaining balance of the funds shall be allocated for the satisfaction of claims ofother creditors in accordance with the procedure set forth below4

Where the proceeds of the sale of the pledged assets are insufficient the remaining amount of unsatisfiedclaims shall be satisfied in the manner (usually third in line) as specified below

Creditorsrsquo claims secured by pledge andor mortgage shall be satisfied in the manner (first in line) asspecified in point 3 below without exceeding the value of the pledged assets determined by anindependent property appraiser


All creditorsrsquo claims based on the sequence specified below shall be satisfied in two stages During thefirst stage claims of creditors without the calculated interest and default interest shall be satisfied inaccordance with the sequence established below and during the second stage ndash the remaining creditorsrsquoclaims (interest and default interest) shall be satisfied according to the same sequence


First in line for satisfaction shall be claims of the employees relating to employment relations claimsfor the compensation for damage due to mutilation or other bodily injury contraction of an occupationaldisease or death due to an accident at work claims of natural and legal persons for payment for

195

agricultural produce purchased for processing

NB The claims of creditors who have granted new credits to the enterprise during the process ofbankruptcy (ie after initiation of bankruptcy) shall be considered as current payment and shall besatisfied after expiry of payment period and without falling in the procedure of claims satisfactionestablished in this part

Second in line for satisfaction shall stand all the remaining claims of creditors except for the creditorsrsquoclaims of third line (as specified below) including claims for payment of taxes and other payments intothe budget as well as compulsory state social insurance contributions and compulsory health insurancecontributions claims relating to loans granted from the funds borrowed on behalf of the State and loansgranted with the guarantee of the State or guarantee institutions the discharge of whose liabilities isguaranteed by the State relating to assistance granted from the EU funds and remaining creditorsrsquo claimssecured by pledge andor mortgage which were not satisfied from the proceeds of the sale of thepledged assets and which exceed the value of the pledged assets not being sold during the bankruptcyprocess

Third in line for satisfaction shall stand all other usual claims of creditors including the of shareholdersof the enterprise in bankruptcy who became creditors of the enterprise prior to initiation of thebankruptcy proceedings and who alone or together with other participants control the enterprise inbankruptcy (who became creditors of the enterprise both directly and indirectly through parententerprises or subsidiaries or through legal persons of other legal forms they control) that are notrelating to employment relations of such shareholders




During the process of restructuring creditorrsquos claims that are secured by pledge andor mortgage shall besatisfied first from the proceeds of the sale of the enterprisersquos pledged assets Where the proceeds of thesale of the pledged assets are insufficient the remaining amount of unsatisfied claims shall be satisfiedin the manner (second in line) as specified in 3 below

Where the restructuring plan does not provide for the sale of the pledged assets creditorsrsquo claimssecured by pledge andor mortgage shall be satisfied in the manner (first in line) as specified in belowwithout exceeding the threshold value of the pledged assets determined by an independent propertyappraiser

The creditorsrsquo claims secured by pledge andor mortgage to the extent they exceed the value of thepledged assets which are not being sold during the restructuring shall be satisfied in the manner (secondin line) as specified below


All creditorsrsquo claims based on the sequence specified below shall be satisfied in two stages During thefirst stage claims of creditors without the calculated interest and default interest shall be satisfied inaccordance with the sequence established below in and during the second stage ndash the remaining

196

creditorsrsquo claims (interest and default interest) shall be satisfied according to the same sequence


First in line for satisfaction shall stand claims of employees relating to employment relations (includingincome tax of individuals and state social insurance contributions) claims for compensation due tomutilation or other bodily injury contraction of an occupational disease or death due to an accident atwork natural and legal personsrsquo claims for payment for agricultural produce purchased for processingand creditorsrsquo claims secured by pledge andor mortgage not exceeding the value of the pledged assetswhich are not being sold during the restructuring

Second in line for satisfaction shall stand all the remaining claims of creditors except for the creditorsrsquoclaims of third line (as specified below) including claims for compulsory payments and loans grantedfrom the funds borrowed on behalf of the State and loans granted with the State guarantee or guaranteeinstitutions the discharge of whose liabilities is guaranteed by the State claims for assistance grantedfrom the EU funds and remaining creditorsrsquo claims secured by pledge andor mortgage which were notsatisfied from the proceeds of the sale of the pledged assets and which exceed the value of the pledgedassets not being sold during the restructuring process

NB The claims of creditors who have granted new credits to the enterprise during the process ofrestructuring (ie after initiation of restructuring according to the business plan for the period ofrestructuring) that are not secured by pledge andor mortgage which arise following non-repayment ofthese credits by the enterprise within the time limits set in the agreements shall be satisfied before thecreditorsrsquo claims of the Second line Thus some special priority is given to creditors who have givennew loans to the enterprise after initiation of restructuring with the intent of helping the company out

Third in line for satisfaction shall stand usual claims of shareholders of the enterprise underrestructuring who became creditors of the enterprise prior to initiation of the restructuring proceedingsand who alone or together with other participants control the enterprise under restructuring (whobecame creditors of the enterprise both directly and indirectly through parent enterprises or subsidiariesor through legal persons of other legal forms they control) that are not relating to employment relationsof such shareholders


Claims of creditors for whom the time limits for the discharge of liabilities have not expired prior toinitiation of the restructuring proceedings shall be satisfied not earlier than after the expiry of those timelimits

During each stage the creditorsrsquo claims of each successive sequence are satisfied following fullsatisfaction of the creditorsrsquo claims of the respective stage of the preceding sequence If funds areinsufficient to satisfy in full all the claims of one stage of one sequence such claims are satisfied inproportion to the amount due to each creditor

Can transaction entered into by the company be vulnerable to attack


Commencement of the insolvency proceedings determines that claims of the creditors can be satisfied

197

only in the manner provided for above and insolvency administrator is responsible for controlling thisprocedure Initiation of insolvency proceedings causes prohibition to discharge financial obligationsnot discharged before initiation of insolvency proceedings including payment of interest forfeit andother prohibition of set-offs and other restrictions Therefore vulnerability to attack of the transactionsentered into by the company after initiation of insolvency proceedings is not very likely

Below the situations when transactions of the company (usually concluded before initiation ofbankruptcy) can be attacked are described

Creditors are entitled to dispute transactions contrary to the interests of the enterprise andor of itscreditors Such transactions can be disputed before and after the initiation of bankruptcy proceedings

Provisions of the Civil Code of the Republic of Lithuania are also applied in the insolvencyproceedings Possible bases for initiation of claims for invalidation of agreements of the enterprise are

a) general bases (eg agreements contradicting imperative provisions of law public order and goodmorals legal passive capacity of a legal person providing for excessive forfeitpenalties (which shouldbe decreased by the court) etc)

b) specific basis (actio Pauliana)

Actio Pauliana (as a specific type of claim) ensures a creditorrsquos right to challenge transactions made bydebtor (the enterprise) where the debtor was not obliged to conclude them and where they violate therights of the creditor while the debtor knew or ought to have known that prejudiceharm to the creditorwould result from that transaction The creditorrsquos rights shall be considered as violated if by suchtransaction the debtor renders himself insolvent or being insolvent he grants preference to anothercreditor or the rights of the creditor are infringed in any other way

A bilateral transaction may be annulled on the ground mentioned above only if the third personconcluding the transaction with the debtor concerned was in bad faith ie he knew or ought to haveknown that the transaction violates the rights of the debtorrsquos creditor A gratuitous transaction may bealways annulled irrespectively of whether the third person is in good or bad faith

Creditor is also entitled on behalf of the company to submit an Indirect claim In the Lithuanian CivilCode it is established that a creditor whose right to claim against the debtor is certain and executableshall be entitled to exercise the rights of the debtor by bringing an action in the debtorrsquos name in theevent where the debtor fails to implement these rights himself or refuses to exercise them to theprejudice of the creditorrsquos interests (an oblique action)

NB Actio pauliana claim and Indirect claim may be used by the creditors irrespective whetherinsolvency proceedings of the company have been initiated or not


The Law on Bankruptcy establishes that bankruptcy administrator shall not later than within six monthsfrom the receipt of documents on the transactions entered into by the enterprise within a period of atleast 36 months before the initiation of bankruptcy proceedings bring actions in court of the enterprise inbankruptcy for the invalidation of the transactions which are contrary to the objectives of theenterprisersquos activities and which could have led to its inability to settle with the creditors as well as forthe establishment of a fraudulent bankruptcy

If in the hearing the court of the enterprise in bankruptcy establishes this case as a case of fraudulent

198

bankruptcy the administrator must review all transactions of the enterprise in bankruptcy concludedwithin the period of 5 years prior to the initiation of bankruptcy proceedings and bring an action in courtaccording to the location of the registered office of the enterprise in bankruptcy for the invalidation ofthe transactions which are contrary to the interests of the enterprise andor which could have led to itsinability to settle with the creditors In this case it shall be considered that the administrator has learntabout the transactions from the day of receipt of the documents regarding the conclusion of thesetransactions

The bankruptcy administrator is supposed to secure and protect the interests of the creditors and todispute the transactions that are contrary to the interests of the enterprise andor the creditors that wereconcluded before the initiation of bankruptcy proceedings



Civil liability

A director (management body) of the company may be liable under civil administrative or criminalliability

The civil liability of the director has been broadly considered by the Supreme Court of the Republic ofLithuania According to the practice of the Supreme Court of the Republic of Lithuania civil liability ofthe director is determined by the violation of imperative legal obligations (established in the Courtprocess) as well as violation of fiduciary obligations of the director towards the company Concerningthe subject to whom the damage was made civil liability may arise for both the company and thecreditors of the company The company shall act in accordance with the interest of all interestedpersons including the creditors The director of the company must combine these interests and pursueequilibrium thereof If the company performs (or fraudulently does not perform) activities and therebyincreases the losses and debts to creditors such actions shall be considered not to be in compliancewith reasonable business practice and confronting good business standards Therefore civil liability ofthe director may occur not only by when the company is not capable to cover the debts of itrsquos creditorsbut can occur upon violation of specific or fiduciary obligations of the director The usual conditions ofcivil liability (applied in continental law countries) in order for the civil liability of the companydirector to arise have to be established ie a) unlawful actions b) damage caused by unlawful actionsc) causal relation between unlawful actions and the damage d) guild (when unlawful actions areestablished which caused the damage guilt shall be assumed) Therefore the claimant has no obligationto prove guilt of the director This assumption can be denied by the director in the proceedings

Civil liability (bankruptcy proceedings)

In the Enterprise Bankruptcy Law it is established that a director of the enterprise or any other person(persons) having the right to adopt a respective decision in the enterprise must compensate the damageincurred by the creditors due to the enterprise missing the deadline for filing with the court of a petitionfor initiation of bankruptcy proceedings

Civil liability (restructuring proceedings)

In the Law on Restructuring no provisions regarding liability of the management bodies of the enterpriseare established due to failure to adopt a decision to initiate enterprise restructuring proceedingsLiability of the director arising because of the damage incurred by the company or creditors shall besubstantiated following the points 311 above

199

Administrative liability

Administrative liability of the director may arise because of violation of company creditorsrsquo rights andinterests Thus at the same time civil and administrative liability may arise

Criminal liability

Criminal liability for a member of a managing body may arise if he performs criminal acts (eg fraudtheft and other) and it shall cause damages to the aggrieved party For example squandering of propertyof the company may be a basis for application of criminal liability

2 Taking action


There are two types of insolvency proceedings bankruptcy proceedings and restructuring proceedingsThree types of bankruptcy processes exists in Lithuania judicial bankruptcy process5 extrajudicialbankruptcy process and simplified bankruptcy process Restructuring processes of the enterprise aresubdivided to judicial and simplified restructuring proceedings6

The main objective of the enterprise bankruptcy is to protect and satisfy the interests of the creditorsSuch purpose mostly is achieved through the sale of assets of the debtor in bankruptcy Initiation ofenterprise bankruptcy proceedings usually causes termination of an enterprisersquos economic activity Afterdeclaration by the court of the enterprise as bankrupt the enterprise is liquidated unless composition(peace) agreement with the creditors is concluded

Objective of the enterprise restructuring proceedings is to satisfy interests of the creditors settle thedebts avert bankruptcy and maintain and continue activities of the debtor (enterprise) Thereforeinterests of the creditors are satisfied in the future Such insolvency proceedings are used for thedebtors which are close to economic difficulties or in such difficulties but still have a potentially viablebusiness Financial difficulties of the company mean that an enterprise is unable to discharge itsobligations and reduce losses which without assistance rendered by creditors would force it toterminate its activities and go bankrupt Therefore if the restructuring procedure is not applied to thecompany it is very likely that company will become insolvent and as a consequence bankruptcy processwill be initiated



The Enterprise Bankruptcy Law establishes that creditors notify the enterprise in writing of the intentionto file with the court a petition for initiation of bankruptcy proceedings There are no direct statements inthe Enterprise Bankruptcy Law that this shall be considered to be a so called informal (pre-insolvency)proceeding but the Supreme Court of the Republic of Lithuania stated that by this provision a pre-insolvency procedure stage is established Pre-insolvency procedure shall be considered as anestablished period of time during which obligations of the creditor shall be discharged

Pre-insolvency procedure shall be considered as implemented if the following procedure is realizednotification of the debtor by the creditor of itrsquos intention to initiate bankruptcy procedures if theobligations of the debtor indicated in the notification will be failed to discharge Creditors shall set a

200

period of at least 30 days for discharge of the obligations

In case of infringement of the pre-insolvency procedure the court shall not initiate bankruptcyproceedings or should terminate the bankruptcy procedure in case it has already been initiatedNevertheless infringement of the pre-insolvency procedure does not preclude the creditors to initiatethe bankruptcy process again but the pre-insolvency procedure has to be exercised in an appropriatemanner


There are no informal (pre-insolvency) procedure established regarding restructuring of the companyDefinitely the company (debtor) and itlsquos creditors may settle their obligations without engaging in therestructuring process




minus the provision that claims of the company creditors in the enterprise bankruptcy proceedings aresubmitted to the court within a period determined by the court from the date of entry into force of thecourtrsquos ruling on initiation of the enterprise bankruptcy proceedings the period shall not exceed 45calendar days After the expiry of time period the creditors are not entitled to submit their claims unlessthe court approves such claims by the reason that the time period was omitted due to important reasons

minus the continuation of the contracts by further execution of which the debtor receives benefit

minus restrictions related to the execution of transactions from the date of coming into effect of the courtruling to initiate the enterprise bankruptcy (please see above)

minus prohibition for the court to adopt a ruling initiating bankruptcy proceedings if the enterpriserestructuring proceedings are initiated or postponement of the initiation of bankruptcy proceedings if apetition for the initiation of restructuring proceedings is received during the examination of the petitionfor the initiation of bankruptcy proceedings and the court ruling to initiate bankruptcy proceedings hasnot yet been adopted

minus prohibition to initiate enterprise bankruptcy proceedings or terminate them if pre-insolvency stage wasinfringed (please see above)

minus etc


minus examination of the transactions entered into by the enterprise in bankruptcy within a period of at least36 months before the initiation of bankruptcy proceedings

minus submission of the claims after omission the aforementioned 45 days time period when importantreasons exist

minus right to receive information regarding execution of the bankruptcy proceedings


201

minus right to request the bankruptcy administrator to present reports about his activity during bankruptcyproceedings and right to approve or refuse the approval of these reports (right of the meeting ofcreditors)

minus right to make decision regarding the continuity renewal restriction or termination of economic andcommercial activities of the enterprise on the approval of the price estimate for sale of the assets etcimposition of restrictions on the disposal of the assets of the enterprise (right of the meeting ofcreditors)

minus right to adopt a resolution on the conclusion of a peace agreement (composition) with the debtor (rightof the meeting of creditors)

minus in case of extrajudicial enterprise bankruptcy procedures right to adopt resolutions which would beadopted by the court in case of judicial or extrajudicial bankruptcy processes (the right of the meeting ofcreditors)

minus etc



minus the provision that claims of the companyrsquos creditorsrsquo in enterprise restructuring proceedings aresubmitted to the court within a period determined by the court from the date of entry into force of thecourt ruling on initiation of the enterprise restructuring proceedings the period shall not exceed 45calendar days After the expiry of the time period creditors are not entitled to submit their claims unlessthe court accepts such claims by the reason that the time period was omitted due to important reasons

minus restrictions related to the execution of transactions from the date of coming into effect of the courtruling to initiate the enterprise restructuring proceedings to the date of adoption of the court ruling toapprove the restructuring plan (please see above)

minus reception of assistance with regard to the discharge of liabilities which arose before the initiation ofthe enterprise restructuring proceedings ie to extend the deadlines for the discharge of claims waiveall claims (or a part thereof) replace a pecuniary obligations by any other obligation to give a consentfor the enterprise to settle with creditors from the assets and shares of the enterprise

minus extension of the duration of the restructuring period

minus and etc


minus right to receive information regarding implementation of the restructuring plan

minus right to submit proposals to the restructuring administrator or the management body of the enterprise inrelation to the restructuring plan

minus right to apply to the meeting of creditors in relation to the activities of the restructuring administratoror replacement thereof

minus right to appeal in court against the resolutions adopted by the meeting (committee) of creditors

202


minus right to approve of refuse to approve the enterprise restructuring plan (the right of the meeting ofcreditors)

minus right to apply to court regarding the restriction of the competence of the management bodies of theenterprise and specify to whom these functions shall be transferred (the right of the meeting ofcreditors)

minus right to endorse the proposal to the restructuring administrator to apply to court for termination of theenterprise restructuring proceedings in the event of failure to implement or improper implementation ofthe restructuring plan or to apply to court for termination of the enterprise restructuring proceedingswhere this is approved by the creditors the amount of whose claims in terms of value accounts for atleast 23 in terms of value of the amount of all the confirmed claims of creditors (the right of themeeting of creditors)

What are triggers for insolvency


The court initiates bankruptcy proceedings in presence of at least one of the following conditions

minus the enterprise is insolvent or the enterprise is late with payment of remuneration and amounts relatingto employment relations to an employee (employees)


Insolvency of the enterprise means the state of an enterprise when it fails to discharge its obligations andthe overdue obligations of the enterprise are in excess of half of the value of the assets entered into theenterprisersquos balance sheet


In order to apply restructuring proceedings of the enterprise the following conditions shall be met

minus the enterprise is in financial difficulties or there is a real possibility that it will be in financialdifficulties within the next three months

minus the enterprise has not discontinued its activities

minus the enterprise is not in bankruptcy or has not gone bankrupt


The enterprise is considered to be in financial difficultiesfinancial distress what means that anenterprise is unable to discharge its obligations and reduce losses which without assistance rendered bycreditors would force it to terminate its activities and go bankrupt The difference between insolvencyof an enterprise and an enterprise in financial difficulties is that overdue obligations of the enterprise infinancial difficulties are not in excess of half of the value of the assets entered into the enterprisersquosbalance sheet

What is the process for filling

203


Bankruptcy proceedings are executed according to the rules established in the Code of Civil Procedureof the Republic of Lithuania and specific rules of the Enterprise Bankruptcy Law In order to commenceinsolvency procedure the following requirements shall be satisfied

minus legitimate subjects apply for the initiation of a bankruptcy case

minus form and content satisfy general requirements set forth in the Code of Civil Procedure of the Republicof Lithuania and specific requirements set forth in the Enterprise Bankruptcy Law

minus pre-insolvency proceedings are applied in compliance with the Enterprise Bankruptcy Law

Petition to the court for initiation of bankruptcy proceedings can be filed if at least one of the followingconditions is present

minus the enterprise fails to pay the salary and other employment-related amounts in due time

minus the enterprise fails in due time to pay for the goods received and works carried out defaults on therepayment of credits and fails to discharge other property obligations assumed under transactions

minus the enterprise fails to pay in due time taxes and other compulsory contributions prescribed by andorthe awarded amounts


minus the enterprise has no assets or income from which debts could be recovered and therefore the bailiffhas returned the writs of execution to the creditor

Reasons of the petition for the initiation of bankruptcy proceedings have to be indicated in the petitionThe petition to the court has to be accompanied by the lists of creditors and debtors of the enterpriseindicating their addresses amounts of liabilities and debts and the time limits for the settlement thereofa set of financial statements for the previous financial year and the period of the reporting financial yearprior to the date of filing of the petition and information relating to the proceedings initiated in courtsand recoveries without suit the pledged assets and other obligations


Restructuring proceedings are executed according to the rules established in the Code of CivilProcedure of the Republic of Lithuania and specific rules of the Law on Restructuring of Enterprises Inorder to commence insolvency procedure the following requirements are met

minus legitimate subjects apply for the initiation of a restructuring case

minus form and content of the application satisfy general requirements set forth in the Code of CivilProcedure of the Republic of Lithuania and specific requirements set forth in the Law on Restructuring

In order to apply for restructuring proceedings of the enterprise the following conditions shall be met

minus an enterprise is in financial difficulties or there is a real possibility that it will be in financialdifficulties within the next three months

204

minus an enterprise has not discontinued its activities

minus an enterprise is not in bankruptcy or has not gone bankrupt


If the enterprise resembles preconditions established for initiation of restructuring proceedings thenparticipants andor owners of an enterprise are entitled according to the Law on Restructuring to submita claim for the initiation of restructuring proceedings The claim has to cover reasons for filing by theenterprise of a petition for the initiation of bankruptcy proceedings list of creditors and debtors of theenterprise amounts of liabilities and debts and time limits for the settlement thereof set of financialstatements list of pledged assets and other obligations

These subjects may file the initiation application to the court after the confirmation of guidelines forrestructuring plan and after the confirmation of candidacy of the restructuring administrator proposed bythe management body of the enterprise The management body of an enterprise has to not later thanwithin five working days after the date of adoption of the decision file a petition to the court on initiationof the enterprise restructuring proceedings

The petition on initiation of the enterprise restructuring proceedings has to be accompanied by thefollowing

minus reason(s) due to which the initiation of the enterprise restructuring is sought for

minus documents certifying that the enterprise complies with the grounds for the initiation of restructuringproceedings

minus guidelines for the restructuring plan and the decision on approval of the guidelines by the meeting ofparticipants or owner of the enterprise

minus a copy of the set of financial statements for the previous financial year and a copy of the balance-sheetand profit (loss) statement for the period of the reporting financial year

minus candidacy of the restructuring administrator



The following persons have the right to file a petition to the court for the initiation of enterprisebankruptcy proceedings

minus creditors

minus owners

minus the head of the enterprise (director of general director)


Subjects entitled to file the initiation of the enterprise restructuring proceedings to the court are

minus meeting of participants (shareholders) of the enterprise

205

minus owners of the enterprise



The court is a subject of the enterprise bankruptcy proceedings and is responsible for effective and justhearing of the bankruptcy case Bankruptcy of the companies may influence social and economic life ofthe country thus the public interest exists in bankruptcy cases Therefore the court shall be active in theproceedings and is responsible for proper and timely execution of the bankruptcy case The generalprinciples of civil procedure such as disposition competition equality of the parties and otherprinciples may be restricted in bankruptcy proceedings However it does not mean that the court in thebankruptcy proceedings shall collect evidences on its own initiative unless the court considers that it isnecessary to act so in order to resolve the case justly


During the restructuring process interests of the creditors employees and the company in debt are beingpursued to save the company from bankruptcy It is certain that this process may have influence not onlyfor few private persons but for the economy and budget of the country Thus public interest exists in theenterprise restructuring cases and the court solving such cases shall act actively The general principlesof civil procedure such as disposition competition equality of the parties and other principles may berestricted in the restructuring proceedings and vested to the competence of the court However it doesnot mean that the court in the restructuring proceedings shall collect evidences at its own initiativeunless the court considers that it is necessary to act so in order to resolve the case justly



The length of bankruptcy proceedings depends on the complexity of the case and whether the partieschallenge the court andor creditor meetingadministrator rulings made during the proceedings and howthe process of elaboration of such claims proceeds According to the general practice bankruptcy of anenterprise lasts from 1 to 25 years on the average


As the length of restructuring proceedings depends on the complexity of the case and whether the partieschallenge the court andor creditor meetingadministrator rulings made during the proceedings and howthe process of elaboration of such claims proceeds The Law on Restructuring provides thatrestructuring of the enterprise shall not exceed 4 years after approval of the restructuring plan whichshall be approved within 6 months after the courtrsquos ruling to initiate restructuring proceedings of theenterprise Restructuring may not last longer than 4 years The management body of the enterprise or therestructuring administrator may by a decision of the meeting of creditors file a petition with the courtfor extension of the enterprise restructuring period The court or a judge may extend the duration ofrestructuring period but not longer than for a period of one year According to the general practicerestructuring of the enterprise lasts from 3 to 5 years on average


General principle of the insolvency proceedings and the law is that any of the claims submitted shouldbe substantiated For example the mere statement that conditions for initiation of insolvency proceedingsexist (please see above) will not be a sufficient basis for the court to initiate insolvency proceedings

206

therefore it has to be substantiated Thus if the creditor is willing that his claims would be approved heshall substantiate it with proper evidence for example proof showing that debtor failed to fulfil hiscontractual obligations etc


Company as a debtor benefits from rights established in the part 3 of the chapter II Also the owners ofthe company in bankruptcy are entitled to participate in the meetings of creditors Management bodies ofthe enterprise (if they stay in office in case of restructuring) are entitled to participate in the meeting ofcreditors and etc


A person responsible for administration of the bankruptcy proceedings is a bankruptcy administrator ndashwho is a natural or a legal person appointed by the court having the right to provide bankruptcyadministration services Bankruptcy administrator is responsible for the bankruptcy procedure hecontrols uses and possess the assets and funds of the enterprise in bankruptcy The administrator alsoensures the security of assets guides the commercial activity secures creditorsrsquo rights executesbankruptcy proceedings of the enterprise in bankruptcy etc

A person responsible for the administration of the restructuring proceedings is a restructuringadministrator ndash a natural or legal person appointed by the court having the right to provide restructuringadministration services Restructuring administrator according to the Law on Restructuring isresponsible to take measures to draft submit for approval and implement a restructuring plan within thetime limits supervise the activities of the management bodies of the enterprise convene the meetings ofcreditors participants (shareholders) of the enterprise owners thereof participate in the meetings andsittings of all the management bodies of the enterprise and the meetings of creditors indicate to themembers of management bodies the shortcomings in their activities and set a time limit for eliminationof those shortcomings



The bellow provided proceedings may be considered as red-flags in the enterprise bankruptcy process


minus Important issue in bankruptcy proceedings is the issue of the bankruptcy administrator and whether thebankruptcy administrator will be more inclined to support and represent the interests of the formershareholders of the enterprise or the interests of some of the biggest creditors A person initiating thebankruptcy proceedings proposes a candidacy of a bankruptcy administrator that should be approved bythe court

minus Second important issue is the issue of being able to control the decisions taken in the Creditorrsquosmeeting Thus it is important to have a majority of claims (directly or via friendly claims) that wouldensure a 51 majority of votes in the Creditorrsquos meeting

If a 51 majority cannot be achieved a smaller majority may also be useful if other creditors are smalland are not able to duly follow the process of bankruptcy as well as participate in all the meetings ofcreditors

minus In connection to the above it must be noted that only claims that are approved by the court are eligible

207

for voting at the creditorrsquos meeting so it is important to achieve that the bankruptcy administrator wouldnot contest the approval of creditorrsquos claims Claims that are not approved and are being contested incourt may not vote at the meetings of creditors until their approval by court

minus It is also important to understand that the chairman of the meeting of creditors has additional powers toreceive information and interact with the bankruptcy administrator on an official level therefore thechairman of the meeting of creditors may influence the bankruptcy procedure

minus The creditorsrsquo committee is formed from representatives of creditors who are voted for by the meetingof creditors and exercises all the rights of the meeting of creditors in between the meetings of creditorsHowever contrary to the usual principle of voting each member of a creditorsrsquo committee has one voteand not a proportion from overall votes Thus a creditor with a smaller claim may exercise much moreinfluence if elected to the creditorsrsquo committee

minus The meeting of creditors approves the procedures of sale of the assets of the enterprise and the startingsale prices of the assets in an auction (these are by custom being prepared and proposed by thebankruptcy administrator) Therefore it is important not to miss this vote and achieve a favourable salesprocedure and a favourable starting price in the auction


minus establishment of a period (by the creditors) of at least 30 days from the date of delivery of thenotification for the discharge of liabilities before initiation of the enterprise bankruptcy proceedings

minus initiation of the enterprise bankruptcy proceedings

minus ruling of the court to commence or refuse to commence the bankruptcy proceedings of the enterprise

minus transfer of the assets (by the management bodies of the enterprise) of the enterprise to the bankruptcyadministrator

minus loss of power of the management bodies of the enterprise

minus notification by the bankruptcy administrator to the persons concerned that he will not execute thecontracts which have been entered into by the enterprise and which period of execution has not yetexpired


minus convention of the first and later meeting of creditors

minus declaration of the enterprise as bankrupt Upon hearing the bankruptcy case the court shall declare theenterprise bankrupt and adopt a ruling to put the enterprise into liquidation if no ruling to conclude apeace agreement with the creditors is adopted within 3 months from the entry into force of the ruling toconfirm the creditorsrsquo claims the court may extend the time limit only if so requested by the meeting ofcreditors Upon declaring the enterprise bankrupt and adopting a ruling to put the enterprise intoliquidation by reason of bankruptcy the court shall confirm the amount of revised claims of eachcreditor the procedure of liquidation other orders and instructions necessary for carrying out theliquidation procedure

minus sale and transfer of assets Procedure for the sale and transfer of assets (shall not exceed 24 months)

minus removal from the Register of Legal Entities of the companyrsquos data Bankruptcy administrator shall not

208

later than within 5 working days from the entry into force of the court decision regarding the terminationof the enterprise submit an application to the Register of Legal Entities for the removal from the registerof the enterprise liquidated by reason of bankruptcy

It shall be noted that commencement of bankruptcy proceedings supposes respective effects which arethe following

minus stay of proceedings - the discharge of all financial obligations not discharged prior to the initiation ofbankruptcy proceedings including the payment of interest forfeit taxes and other compulsorycontributions and the recovery of debts from the enterprise through court or without suit except for set-off where such set-off is permitted under the provisions of set-off of tax overpayment (difference)provided is prohibited Calculation of forfeit and interest on all obligations of the enterprise includinglate payment of amounts relating to employment relations terminates

minus if within 30 days from the entry into force of the ruling to initiate bankruptcy proceedings thebankruptcy administrator notifies the persons concerned that he will not execute the contracts whichhave been entered into by the enterprise and which period of execution has not yet expired theaforementioned contracts except for the employment contracts and contracts from which the rights ofclaim of the enterprise in bankruptcy arise are deemed to have expired


The bellow provided proceedings may be considered as red-flags in the enterprise restructuringprocess


minus As in the bankruptcy proceedings it is important that in restructuring proceedings the administratorwould be ldquofriendlyrdquo and would not oppose to the initiatives of the creditors This however is not soimportant as in bankruptcy because in a restructuring process the management bodies of the company donot cease to have their powers and are still running the company whereas the administrator mostlyoversees the activities of the management bodies

minus In a restructuring process it is of utmost importance to gather a 23 majority of friendly or neutralcreditors at the meeting of creditors in order to approve the restructuring plan If a restructuring plan isnot approved the process of restructuring cannot start

minus The process of drafting of the restructuring plan and its contents are also very important as accordingto it the repayment of creditorrsquos claims will be performed It is always important to keep control of thedrafting of the restructuring plan

minus Due performance of the approved restructuring plan is also very important as failure to perform it mayresult in termination of the restructuring process and initiation of bankruptcy


minus preparation of the documents regarding initiation of the enterprise restructuring proceedings(preparatory stage please refer to the part 4 of chapter II)

minus the decision of the management body to file the petition to the court on initiation of restructuringproceedings

minus ruling of the court to commence or refuse to commence restructuring proceedings of the enterprise

209


minus preparation of the restructuring plan of the enterprise

minus sale and transfer of assets satisfaction of creditors claims (shall not exceed 24 months)

minus decision to approve or refuse to approve the restructuring plan of the enterprise

minus closure of the enterprise restructuring Upon the implementation of the restructuring plan themanagement body shall within 10 working days prepare a statement on the implementation of therestructuring plan Upon receiving the statement the court shall adopt a decision to approve thesubmitted statement on implementation of the restructuring plan and close the enterprise restructuringproceedings Restructuring administrator shall within 5 working days from the date of coming intoeffect of the court decision to terminate the enterprise restructuring proceedings notify respectivepersons

Great importance in the restructuring proceedings is paid to the restructuring plan which is a measure toachieve the objectives of restructuring within a certain period of time and includes the information howto settle the financial difficulties and satisfy claims of creditors Restructuring plan includes thefollowing information

minus the aims and duration of restructuring

minus business plan of an enterprise for the period of restructuring

minus a list of creditors the amounts of their claims and time limits for the satisfaction thereof

minus anticipated assistance of creditors with regard to the discharge of debt liabilities which arose beforethe initiation of the enterprise restructuring proceedings in court

minus a list of debtors of the enterprise

minus duration of restructuring of the enterprise

minus an estimate of administrative expenses

minus and etc

minus and etc

It shall be noted that the Law on Restructuring establishes certain restrictions related to the execution oftransactions from the date of coming into effect of the court ruling to initiate the enterprise restructuringproceedings to the date of adoption of the court ruling to approve the restructuring plan and they are thefollowing

minus a general prohibition to discharge all the pecuniary obligations which were not discharged before thedate of coming into effect of the court ruling to initiate the enterprisersquos restructuring proceedingsincluding the payment of interest default interest and other compulsory payments to recover debts fromthe enterprise in judicial or extrajudicial proceedings to apply judicial pledge servitudes usufruct tooffset claims to pledge sell or otherwise transfer the assets of the enterprise necessary for continuationof its activities is valid

minus calculation of forfeit and interest for all the obligations of the enterprise which have accrued before

210

the date of coming into effect of the court ruling to initiate the enterprisersquos restructuring proceedings issuspended

minus suspension of recovery under writs of execution and set-off of claims

However during the above mentioned period the enterprise shall in the usual manner pay all of its on-going payments and obligations


No

3 Creditor issues


Unsecured creditors in the insolvency proceedings are affected by the sequence of satisfaction of claims(refer to the part 1 of chapter I)



In the Enterprise Bankruptcy Law the following procedure how to enforce a secured claim isestablished

1) immovable property and pledged assets are sold at auction in accordance with procedure laid downby the Government of the Republic of Lithuania

2) animals products and other easily perishable products or assets which are likely to quickly lose theircommercial value are sold at a price set by the administrator taking into account the actual transactionprices of analogous goods on the market

3) the procedure for sale of other assets as well as immovable property unsold at two auctions isestablished by the meeting of creditors Upon decision of the meeting of creditors these assets may besold in accordance with procedure established by the meeting of creditors

4) the securities (shares bonds and other securities) held by the enterprise in bankruptcy or a bankruptenterprise must be sold in accordance with the procedure laid down by legal acts regulating trading insecurities

Unsold assets may be transferred to the ownership of creditors Where the sale of themortgagedpledged assets has been announced prior to the date of initiation of bankruptcy proceedingsthe bailiff completes the sale of the assets in accordance with the procedure laid down in the Code ofCivil Procedure and upon the sale of the assets at auction transfers the proceeds to the account of theenterprise in bankruptcy

Procedure of sale of pledgedmortgaged assets of the company

The procedure of the sale of company assets is established in the Instructions on Procedure of Sale ofAssets of Bankrupt Companies by Public Auction approved by the Government of the Republic of

211

Lithuania (hereinafter ndash the Instructions) The bankruptcy administrator is responsible for executing thepublic auction According to the Instructions the procedure of a public auction shall be as follows

minus meeting of creditors sets down the starting price of the Companyrsquos assets

minus the bankruptcy administrator shall no later than 30 days before the auction transfer required dataregarding initiation of the auction to the competent institution

minus the winner of the auction shall within 15 days from the day of the auction provide the bankruptcyadministrator with a confirmation regarding full payment for the property the winner has bought in theauction

minus the bankruptcy administrator after receiving the confirmation regarding payment for the property soldin the auction shall conclude a deed of the auction Chairman of the meeting of creditors shall approvethe deed of auction If the winner of the auctions fails to pay the price for the property in full the auctionshall be considered as failed

minus If the auction shall be considered to have failed the bankruptcy administrator shall not earlier than 10days and not later than 30 days after the declaration about the failure of the first auction organize asecond auction

minus if the winner of such second auction fails to make full payment for the assets in 15 days a repetitiveauction shall be held

minus If the assets are not sold in the second and in the repetitive auction they may be transferred to theownership of the pledgeemortgagee

minus how to use the assets that were not sold during the second or the repetitive auction shall be decidedupon by the creditors whose claims have not been satisfied

The procedure for sale and transfer of assets should not exceed 24 months


Sale of the mortgagedpledged company assets during the process of restructuring of the company shallbe established in the restructuring plan of the company As the restructuring plan shall be approved bythe meeting of creditors the creditors of the company have great influence on establishment of thecompany asset sale procedure



Set-off after the courtrsquos initiation of the bankruptcy proceedings is prohibited except for set-off wheresuch set-off is permitted under the provisions of set-off of tax overpayment (difference) provided for inthe tax legislation


Any kind of set-off after courtrsquos initiation of restructuring proceedings until courtrsquos approval ofrestructuring plan is prohibited


212

No

Is creditor resource available in respect of any company affiliates

No



Committee of creditors may be elected by the first and subsequent meetings of creditors The committeeof creditors controls the course of insolvency process the activities of the administrator protects theinterests of creditors in the periods between the meetings of creditors Rights of the committee ofcreditors are established by the meeting of creditors Each member of the committee has one vote Thecommittee of creditors adopts resolutions by simple majority vote and in the event of a tie thechairmanrsquos vote is the casting one


Meeting of creditors is a body that generates resolutions of creditors Resolutions are adopted by votingin the meeting of creditors Thereupon creditors may decide to embody their rights not directly but in theperiods between the meetings of creditors through the Creditorsrsquo Committee elected by the meeting ofcreditors The Chairman of the meeting of creditors shall also be the Chairman of the CreditorsrsquoCommittee Election of the Creditorsrsquo Committee is not mandatory

The committee must be formed of at least 5 persons One person has one vote At least one personrepresenting the interests of employees of the company in the bankruptcy proceedings has to be elected amember of the Creditorrsquos committee The Creditorsrsquo Committee supervises the process of bankruptcythe activities of the administrator and defends the interests of creditors in periods between the meetingsof creditors The rights and powers of the Creditorsrsquo Committee are established and set down by themeeting of creditors

A Meeting of a Creditorsrsquo Committee is deemed to have occurred lawfully if the meeting is attended bymore than half of its members Decisions are adopted by a simple majority vote in case of a tie thechairmanrsquos vote is the casting one

Restructuring proceeding

Meeting of creditors is a body that generates resolutions of creditors Resolutions are realized by votingin the meeting of creditors Resolutions are adopted by voting in the meeting of creditors Thereuponcreditors may decide to embody their rights not directly but in the periods between the meetings ofcreditors through the Creditorsrsquo Committee elected by the meeting of creditors The Chairman of themeeting of creditors shall also be the Chairman of the Creditorsrsquo Committee Election of the CreditorsrsquoCommittee is not mandatory

The Committee must be formed of at least 5 persons One person has one vote At least one personrepresenting the interests of employees of the company in the restructuring proceedings has to be electeda member of the Creditorrsquos committee The Creditorsrsquo Committee performs the functions assigned to itby the meeting of creditors and defends the interests of creditors in periods between the meetings ofcreditors The rights and powers of the Creditorsrsquo Committee are established and set down by themeeting of creditors

A Meeting of a Creditorsrsquo Committee is deemed to have occurred lawfully if the meeting is attended by

213

more than half of its members Decisions are adopted by a simple majority vote in case of a tie thechairmanrsquos vote is the casting one




Commencement of bankruptcy proceedings determines that the management bodies of the enterprise (orowner) transfer to the bankruptcy administrator the assets of the enterprise according to the balancesheet drawn up on the basis of the data available on the day of entry into force of the ruling to initiatebankruptcy proceedings and all the documents within the time limits set by the court The managementbodies of the enterprise lose their powers Therefore the company in bankruptcy is controlled by thebankruptcy administrator Bankruptcy administrator is responsible for bankruptcy procedure hecontrols uses and possess assets and funds of the enterprise in bankruptcy administrator ensuressecurity of assets guide commercial activity secure creditorsrsquo rights execute bankruptcy proceedings ofthe enterprise in bankruptcy and etc


Commencement of restructuring proceedings determines that the management bodies of the enterprisewithin their competence defined in the founding documents of the enterprise and other documentsregulating the activities of the enterprise in compliance with the restructuring plan manage use anddispose of all the assets owned or held in trust by the enterprise and manage the activities of theenterprise The activities of the Management bodies of an enterprise in the course of restructuring aresupervised by the restructuring administrator appointed by the court However the restructuringadministrator does not take over the functions and rights of the management bodies of the enterprise



The commencement of the bankruptcy proceedings is considered the date when ruling of the court toinitiate bankruptcy proceedings enters into force Commencement of bankruptcy process causes thatmanagement bodies of the enterprise loose their powers The bankruptcy administrator may announce thecurrent agreements of the enterprise to be terminated or continue some economic and commercialactivities of the enterprise only provided that they reduce the losses of creditors incurred by reason ofthe bankruptcy Meanwhile the meeting of creditors may suspend or terminate the economic andcommercial activities of the company Thus economic activity of the company may be restricted by thebankruptcy administrator or the meeting of creditor or just because of the business logic As a resultthere is little or no interest to engage in economic activities with a company which is insolvent or facesfinancial difficulties Thus the ability to be financed is very much restricted The risk of financing thecompany in bankruptcy or in restructuring and engaging in economic and commercial activity with suchan enterprise is risky and shall be well considered by the creditor because repayment of itrsquos obligationmay not be possible at all


It is more likely to receive funding for the company under restructuring because the company is

214

continuing itrsquos activity and acting under a plan how to avoid financial difficulties Funding possibility ofthe company under restructuring may differ depending in what stage of restructuring the company is inTherefore restructuring of the company is divided into two stages

1) Period from the date of initiation of enterprise restructuring proceedings until the date of approval ofthe restructuring plan (drafting of restructuring plan)

2) Period after the date of approval of the restructuring plan

From the date of enterprise restructuring proceedings initiation until the approval of restructuring plan(drafting of restructuring plan) certain restrictions shall be applied This results in that the possibility toreceive funding for the company is more complicated

It is prohibited

minus to sell the enterprise or a part thereof its long-term assets or property rights

minus to transfer the enterprise or a part thereof its long-term assets or property rights into the ownership ofother persons or to allow them to use the assets of the enterprise without remuneration

minus to grant guarantees provide surety pledge or secure the discharge of obligations of other persons inany other way

The approval by the court of the restructuring plan causes that the above mentioned restrictions are notvalid anymore and that the liquidity of the company increases Therefore the possibility to receivefunding also increases Any kind of funding during this stage may be provided for the company howeverthe decision of management bodies to accept the funding should not violate the restructuring plan of thecompany


There is no special procedure established for the DIP funding The procedures established in the part 2of chapter IV shall be applied



The bankruptcy administrator shall within three working days from the entry into force of the courtruling to initiate bankruptcy proceedings against the enterprise notify the employees of the enterprise inwriting of the intended termination of the employment contracts and terminate the employment contractswith them after 15 working days from such notification Upon termination of the employment contractthe dismissed employee shall be paid a severance payment in the amount of his two average monthlysalaries The number of employees according to positions who are to be recruited under fixed-termagreements for work during the enterprises bankruptcy process shall be determined by the meeting ofcreditors The list of such employees shall be drawn up by the administrator

Under the procedure established in the Enterprise Bankruptcy Law employees of the company areentitled to initiate bankruptcy of the company (also refer to the parts 4 and 6 of chapter II)

Settlement with the employee to be dismissed shall be effected in accordance with the procedure laiddown in the part 1 of chapter I

215


Restructuring of the enterprise is a procedure whereby economic difficulties faced by the company shallbe overcome Therefore it may be necessary to dismiss certain amount of employees from the companyin order to avoid economic activity causing losses to the company and itrsquos creditors In the Law onRestructuring special provisions regarding employment relationship after the initiation of the enterpriserestructuring are not established Thus when an employee is dismissed due to the restructuring of anenterprise regular laws regulating employment relationship (ie the Labour Code) shall be appliedAccording to the Lithuanian Labour Code an employer shall be entitled to terminate an employmentcontract only for valid reasons by giving a written notice to the employee two months in advanceRestructuring of the company shall be considered as a valid reason When an employment agreement isterminated due to enterprise restructuring a severance pay shall be paid to the employee The amount ofseverance pay varies from one month to six month of employeelsquos average salary Amount of severancepay depends on for how long the employee has worked in the company

Special provisions regarding dismissal of pregnant women and employees raising children (childrenunder 3 years) shall be applied



The Enterprise Bankruptcy Law establishes that if within 30 days from the entry into force of the rulingto initiate bankruptcy proceedings the administrator notifies the persons concerned that he will notcontinue to execute the contracts which have been entered into by the enterprise and which period ofvalidity has not yet expired the aforementioned contracts (including lease and loan for use contracts)shall be deemed to have expired Where the management bodies of the enterprise have transferred to thebankruptcy administrator not all the data about the contracts entered into by the enterprise theobligations assumed and documents relating to the contracts entered into by the enterprise the time limitfor notifying the persons concerned about the non-execution of such contracts shall be calculated as ofthe date of receipt of the data about these contracts or obligations and documents This special provisionwhereby agreements engaged by the company may be terminated is exception of the pacta sunt servandaprinciple established in the Civil Code of the Republic of Lithuania however it shall not be consideredas such which exempt the company in bankruptcy from the liability arising as a consequence arisingfrom the termination of the agreements

However business logic and practice as well as interests of creditors suppose that execution ofundertaken contracts may be beneficial for the company and creditors Therefore it is established in theEnterprise Bankruptcy Law that the enterprise shall be entitled to engage in economic and commercialactivities provided they reduce losses of creditors incurred by reason of bankruptcy and use the incomereceived from such activities to cover the expenses related to these activities (also refer to part 2 ofchapter IV)


Please refer to the part 2 of chapter IV



216

Claim is to be considered a creditorrsquos material interest to require a debtor to discharge its obligations tothe creditor or a person indicated by the creditor

The creditor shall identify the amount and type of the claim the fact whether claim is secured or notalso information regarding whether period execution has expired or not documents substantiating theclaim should also be provided

The claim for initiation of the Bankruptcy process should be filed to the county court of the registrationaddress of the debtor

Claims of creditors that are to participate in the bankruptcy proceedings have to be filed with the court(through the bankruptcy administrator) within the terms indicated by the court as listed below



Claims of creditors in the enterprise bankruptcy proceedings are submitted to the court within a perioddetermined by the court that starts from the date of entry into force of the court ruling on initiation of theenterprise bankruptcy proceedings The period cannot exceed 45 calendar days after the list of creditorsand their claims is submitted to the court by the bankruptcy administrator Such claims may be adjustedif during the bankruptcy proceedings new and unknown circumstances (unknown before confirmation ofthe claims by court) appear and shall be confirmed by a court ruling prior to adoption by the court of aruling on end of the company

Subjects which have engaged in economic activities with the company are entitled to submit theirclaims after the adoption of creditorslsquo claims

The period established to submit creditorslsquo claims is not resolutely-time limited In the EnterpriseBankruptcy Law it is established that court shall have the right to accept for confirmation claims ofcreditors which have been submitted in breach of the time limits specified above provided that itrecognises the reasons for missing the time limits as important The laws do not establish what reasonsshall be considered as important Therefore it is the courtlsquos decisions to decide upon renewal of thetime period to submit the creditorlsquos claim


Claims of the creditors in enterprise restructuring proceedings have to be submitted to the court withinperiod of time determined by the court from the date of entry into force of the court ruling on initiation ofenterprise restructuring proceedings the period is at least 30 calendar days but not longer than 45calendar days Claims may be adjusted if during restructuring proceedings new and unknowncircumstances appear and such amended claims shall be confirmed by a court ruling prior to adoption bythe court of a ruling on the termination of or a decision on the closure of enterprise restructuringproceedings

Subjects which have engaged into economic activity with the company are entitled to submit theirclaims after the adoption of creditorslsquo claims (also refer to the part 1 of chapter I)

The period established to submit a creditorslsquo claims is not resolutely-time limited The court shall havethe right to accept creditorsrsquo claims which have been submitted in breach of the time limits specifiedabove provided that it recognises the reasons for missing the time limits as important The laws do notestablish what reasons shall be considered as important therefore it is a courtlsquos decisions to decideupon renewal of time period to submit a creditorlsquos claim

217


For the ranking of claims please refer to the part 1 of chapter I

Are there other complex issues arising by virtue if the insolvency for example an insolvency officerprescribed method for claims filing

Insolvency administrator is entitled to propose the agenda of the meeting of creditors he also defineswhich documents shall be submitted in order to substantiate a creditorrsquos claim The administrator maycontest the claims submitted by creditors in the court hearing the bankruptcy case



In the Enterprise Bankruptcy Law it is established that where a petition for initiation of restructuringproceedings is received during the examination of the petition for initiation of bankruptcy proceedingsand the court ruling to initiate bankruptcy proceedings has not yet been adopted the examination of thepetition for initiation of bankruptcy proceedings shall be postponed until the court ruling to initiaterestructuring proceedings or to refuse to initiate restructuring proceedings is adopted If the court adoptsa ruling to initiate restructuring proceedings the court shall refuse to initiate bankruptcy proceedings ofthe enterprise Thus this regulation may be considered as a process having the features of a cram-downprocedure Nevertheless the Law on Restructuring provides that when in the course of examination thecourt makes a reasoned conclusion that the enterprise is insolvent and where there are other conditionsto initiate bankruptcy proceedings as specified in the Enterprise Bankruptcy Law a petition on initiationof the bankruptcy proceedings shall be filed with the court in accordance with the procedure establishedby the Lithuanian Enterprise Bankruptcy Law

Therefore having the features of a cram-down procedure established in the Enterprise Bankruptcy Lawdoes not prevent the company from going into bankruptcy proceedings when clear conditions forbankruptcy of the enterprise exist In uncertain cases it shall be under the competence of the court todecide whether the possibility that the company will overcome the financial difficulties and will be ableto repay its debt and therefore continue the restructuring proceedings exists or whether the mentionedobjectives are impossible to achieve and bankruptcy of the enterprise should be started



Liquidation of the enterprise

Upon hearing the bankruptcy case and declaring an enterprise bankrupt the court adopts a ruling to putthe enterprise into liquidation by reason of bankruptcy The court declares the enterprise bankrupt andadopts a ruling to put the enterprise into liquidation within three months from the entry into force of theruling to confirm the creditorsrsquo claims unless a ruling to conclude a peace agreement with the creditorsis adopted The court may extend the time limit only if so requested by the meeting of creditors

Upon receiving the proposal of the meeting of creditors to apply the liquidation procedure in respect ofthe enterprise earlier than within three months from the entry into force of the ruling to confirm thecreditorsrsquo claims the court shall forthwith resolve the issue of declaring the enterprise bankrupt andliquidation thereof

218

When all the bankruptcy procedures are completed and all the options for satisfactions of creditorsrsquointerests are fulfilled the court upon receiving data established in the Enterprise Bankruptcy Lawadopts a ruling to liquidate the enterprise The enterprise acquires the status of lsquoliquidatedrsquo and after fewadditional actions performed by the bankruptcy administrator shall be liquidated

Other means whereby bankruptcy proceedings are terminated

The liquidation of the company is not the single option to conclude bankruptcy proceedings Bankruptcyproceedings of an enterprise may be concluded also on the following bases

minus all creditors waive their claims and the court adopts a ruling to accept the waivers

minus the enterprise in bankruptcy settles with all the creditors (creditor) and the administrator submits tothe court documents in proof thereof

minus a peace agreement with the creditors is concluded and the court approves it

Whereas termination of the bankruptcy proceedings determines that the company is not insolventanymore there is no basis for implementing of exemptions established in the Enterprise BankruptcyLaw which are related to the companyrsquos ability to execute undertaken obligations Therefore from themoment of termination of the enterprise bankruptcy proceedings all taxes and compulsory contributionsas well as interest and default interest shall be calculated from the entry into force of the court ruling toterminate the bankruptcy proceedings


Implementation of restructuring proceedings

Upon implementation of the restructuring plan the management body of the enterprise and therestructuring administrator shall within 10 working days from the day of performance of the lastpayment to the creditors as set out in the restructuring plan prepare a statement on the implementationof the restructuring plan The statement shall be signed by the management body of the enterprise therestructuring administrator authorized persons of the meeting of participants (shareholders) of theenterprise the owner thereof and the chairman of the meeting of creditors

The Restructuring administrator shall submit this statement to the court not later than within threeworking days from signing thereof

Upon receiving the statement on implementation of the restructuring plan the court shall adopt adecision to approve the submitted statement on implementation of the restructuring plan and close theenterprise restructuring proceedings

Termination of enterprise restructuring proceedings

The court shall terminate enterprise restructuring proceedings when

minus the restructuring plan is not submitted within the set time limits

minus all creditors waive their claims and the court approves their waiver

minus the enterprise under restructuring has satisfied the claims of all creditors before the time limit set inthe restructuring plan and the restructuring administrator has submitted the evidence thereof to the court

219

minus the restructuring administrator or the meeting of creditors submit to the court evidence of failure toimplement or improper implementation of the restructuring plan

minus upon expiry of the time limit for the implementation of the Restructuring plan a statement on theimplementation of the plan is not submitted

Upon coming into effect of the court ruling on the termination of the enterprise restructuring proceedingson the grounds specified in the above points 1 4 or 5 and where there are other conditions to initiatebankruptcy proceedings as specified in the Enterprise Bankruptcy Law a petition on the initiation ofbankruptcy proceedings must be filed with the court in accordance with the procedure laid down by theEnterprise Bankruptcy Law

According to the Law on Restructuring if during the implementation of the restructuring plan legalgrounds to initiate bankruptcy proceedings appear and the court receives an application to initiatebankruptcy proceedings of the enterprise the court shall adopt a ruling to terminate the restructuringproceedings and initiate bankruptcy proceedings as specified in the Enterprise Bankruptcy Law



The bellow is provided data from the Lithuanian Department of Statistics about the satisfaction ofcreditorsrsquo claims in bankruptcy proceedings during the period 1993 ndash 2011

minus 191 of creditors claims secured by mortgage or pledge were satisfied

minus 30 of banksrsquo claims were satisfied

minus 537 of employees claims were satisfied (including funds of the Guarantee Fund)

minus 101 of state tax inspections claims were satisfied

minus 86 of State social insurance fund management board claims were satisfied

minus 62 of other creditorsrsquo claims were satisfied

In total 104 of all creditors claims were satisfied


There is no data provided regarding satisfaction of creditorsrsquo claims in restructuring proceedings



Regarding non-formal procedures of the company bankruptcy and restructuring please refer to the part 2of chapter II



220

Extrajudicial bankruptcy proceedings

Extrajudicial bankruptcy proceedings may be applied provided that no action has been brought in courtin which property claims including claims relating to employment relations have been entered againstthe enterprise also if no recovery is made from the enterprise under the writs of execution issued bycourts or other institutions The resolution to carry out extrajudicial bankruptcy procedures may beadopted by the meeting of creditors if the resolution is voted in favour of in open voting by the creditorswhose claims in terms of value account for at least 34 of the amount of all the liabilities of theenterprise on the day of adoption of the resolution including those which have not yet matured

Extrajudicial bankruptcy proceedings shall be carried out in compliance with the Enterprise BankruptcyLaw The issues assigned to the competence of the court shall be considered and decided upon by themeeting of creditors Only the creditors may initiate extrajudicial bankruptcy proceedings

Extrajudicial bankruptcy process last for 1 year on average

Simplified bankruptcy proceedings

When during the examination of the enterprise bankruptcy case the court makes a conclusion that theenterprise has no assets or that its assets are insufficient to cover the legal and administrative expensesof bankruptcy the court may adopt a ruling to apply the simplified bankruptcy proceeding Simplifiedbankruptcy proceeding may not last longer than one year from the day of entry into force of the ruling toapply the simplified bankruptcy proceeding Proceedings of liquidation of the company because ofbankruptcy shall be applied during the simplified bankruptcy proceeding The issues concerning the saleof assets assigned to the competence of the meeting of creditors shall be resolved by the court

Simplified bankruptcy process lasts for 1 year on average


Simplified restructuring proceedings

The restructuring proceedings of an enterprise may be initiated as simplified restructuring proceedingswhen the draft of restructuring plan in accordance with the Law on Restructuring is drawn up andapproved by the 23 majority of creditors prior to the filing with the court of a petition to initiate theenterprise restructuring proceedings The court shall not later than within one month adopt a ruling toinitiate the enterprise restructuring proceedings approve the restructuring plan and appoint arestructuring administrator or to refuse to initiate the enterprise restructuring proceedings The durationof restructuring of the enterprise shall be established in the restructuring plan Restructuring may not lastlonger than 4 years The management body of the enterprise or the restructuring administrator may by adecision of the meeting of creditors file a petition with the court for extension of the enterpriserestructuring period The court or a judge may extend the duration of the restructuring period but for nolonger than for one year



On the International level the issues concerning insolvency proceedings are regulated by a number ofmultilateral and bilateral legal assistance agreements7 however these agreements mostly regulate the

221

aspects of jurisdictions and recognition of certain documents but do not provide for material provisionsregarding implementation of insolvency proceedings Therefore in case of an international bankruptcylegal assistance agreements and provisions of the Civil Code of the Republic of Lithuania regardingapplicable law and the Lithuanian Code of Civil Procedure regarding jurisdiction shall be applied

On the European Union level sustentative importance is possessed by the Council Regulation (EC) No13462000 of 29 of June 2000 Also the decisions of the European Union Court of Justice regardingapplication of the Council Regulation (EC) No 13462000 should not be violated in any form


On the European Union level the Council Regulation No 13462000 (Regulation)

has significant importance This Regulation is applied in all Member States except for Denmark

The Regulation establishes provisions regarding jurisdiction applicable law recognition andenforceability of judgments

If the centre of the main interests of a company within the meaning of recitals 12 and 13 of the preambleto Regulation 13462000 is in a EU member state (except for Denmark) then the insolvencyproceedings of that state are recognized as the main insolvency proceedings and bankruptcy is declaredin that state

In cases of international bankruptcy when the Council Regulation No 13462000 shall not be appliedprovisions of the bilateral and multilateral agreements shall come into force When any of the abovementioned legal acts cannot be applied provisions of the Code of the Civil Procedure of the Republic ofLithuania (hereinafter ndash the Code of Civil Procedure) and the Civil Code of the Republic of Lithuaniacome into effect

In the Code of Civil Procedure it is established that in cases of absence of an international agreementdecisions of foreign courts are recognized unless

minus the decision is not valid in accordance with the laws of the country where the decision was adopted

minus the case is attributable only to the competence of the courts of the Republic of Lithuania or other thirdcountry courts

minus the party which did not participate in hearing of the case had not been properly informed about theinitiation of a civil (including bankruptcy) case and during the process its possibility to defend its casewas violated

minus the decisions the recognition whereof is asked for is not in compliance with the decisions of aLithuanian court that took place between the same parties regarding the same matter

minus the decision the recognition whereof is asked for is not in compliance with the public orderestablished in the Constitution of the Republic of Lithuania

222

Malaysia

ZUL RAFIQUE amp partners partner Mariette Peters

wwwzulrafiquecommy email MariettePeterszulrafiquecommy tel +60 3 6209 8228



Depends on the security given ndash for example

a) charge ndash enforcement of a charge

b) lienmortgagepledge ndash enforcement generally subject to the creditor having possession of the asset


Yes The transactions may be void or voidable for undue preference and fraud


If in the course of the winding up of a company a director or an officer of the company who hasmisapplied or liable for any money or property or guilty of any misfeasance or breach of trust or duty inrelation to the company that director if found guilty may be imprisoned or a monetary penalty imposedon him

2 Taking action


If the company is insolvent the liquidatorreceiver manager appointed to realize the assets and pay ofthe creditors This may lead to winding up of the company Alternatively the company its creditors andmembers may approve a scheme to address the concerns of all parties The company and its membersand creditors may enter into such compromise or arrangement (whether or not for persons of or inconnection with a scheme or reconstruction) The Court at such application for a scheme additionallymake an order to restrain any proceedings in any action or proceedings against the company

If the business of the company has been carried out without proper records to defraud the creditors ofthe company and investigations confirmed that any director officers or persons who was knowinglybeen a party to carrying on the business in such manner the Court may at the application of the liquidatoror a creditor make the persons personally liable for all and any debts Additionally the persons may beliable to pay monetary penalties or be imprisoned


No informal procedures set out in our company laws

223


No procedure benefits either The company is in distress unless the creditor is secured he is likely totake a hair-cut for the loans or credits extended and insofar as the company unless the monies and assetsmay be freed up there is only winding up


At the company cannot pay its debts and a company is deemed unable to pay debts if

(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding fivehundred ringgit then due has served on the company by leaving at the registered office a demand underhis hand or under the hand of his agent thereunto lawfully authorized requiring the company to pay thesum so due and the company has for three weeks thereafter neglected to pay the sum or to secure orcompound for it to the reasonable satisfaction of the creditor

(b) execution or other process issued on a judgment decree or order of any court in favour of a creditorof the company is returned unsatisfied in whole or in part or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts and indetermining whether a company is unable to pay its debts the Court shall take into account the contingentand prospective liabilities of the company


Voluntary winding is divided into 2 categories

1) Membersrsquo voluntary winding up is the liquidation of a solvent company where the directors haveformed an opinion that the company will be able to pay its debts in full within the period of 12 monthsafter the commencement of winding up as stated under section 257 of the CA 1965 and

2) Creditorsrsquo voluntary winding up is a liquidation of an insolvent company where the directors make adeclaration stating that the company cannot by reason of its debts and liabilities continue its businessA meeting between the company and its creditors must be summoned within 1 month from the date of thedeclaration

A scheme of arrangement may be made by the company or any or its creditors or members to the Court ameeting will be held to an order of the Court to secure a resolution made by three fourths in value of thecreditors or classes of creditors or members or class of members agreeing to any compromise andorarrangement as approvedsanctioned by the Court


Winding up by the Court

(i) The company

(ii) Any creditor including a contingent or prospective creditor of the company

(iii) A contributory or any person who is the personal representative of a deceased contributory or thetrustee in bankruptcy or the official assignee of the estate of a bankrupt contributory

(iv) The liquidator

224

(v) The Minister pursuant to Section 205 or on the grounds specified in Section 218 (1)(d) of theCompanies Act

(vi) The Bank Negara Malaysia in the case of a company which is a licensed institution under theFinancial Services Act or under the Insurance Act 1996

(vii) The Registrar on the ground specified in Section 218(1)(m) or (n) of the Companies Act

Voluntary Winding up

(i) The shareholders ndash where a declaration of solvency (that the company will be able to pay its debts infull within 12 months of the commencement of winding up) has been made and lodged pursuant toSection 257 of the Companies Act

(ii) The creditors ndash where no declaration of solvency has been made and lodged (when a company isinsolvent the Companies Act gives the control of a creditorsrsquo voluntary winding up in the hands of thecreditors)


(i) The company

(ii) The creditors

(iii) Its members

(iv) Liquidator


The Court plays a supervisory role in a creditors winding up and scheme of arrangement


Much will depend on whether the winding up proceedings are contested or not


Other than making the court applications there would be notices to be sent to creditors of a creditorsmeeting as well as advertisements placed in newspapers circulating throughout Malaysia to giveopportunity to creditors to attend the creditors meeting and submit their respective claims


Under the scheme of arrangement the company can make an application to restrain further proceedingsprior to the winding up where a compromise or arrangement has been proposed The restrain willallow the company to reconcile its financial undertaking and plan for a reconstruction or repayment ofits debts to the creditors


Yes To a certain extent a ldquoscheme of arrangementrdquo under Section 176 of the Companies Act inMalaysia is akin to what is called ldquodebtor in possessionrdquo in the United States (DIP) which comes undera debt restructuring mechanism of Chapter 11 of the US Bankruptcy Code Unlike liquidation which

225

involves a liquidator taking over the company in a Chapter 11 scenario the control of the debtorcompany remains with its management through the concept of DIP As a safeguard the debtor companywill be subjected to oversight by the bankruptcy court and the trustee A scheme of arrangement like theDIP is an alternative way for creditors to recover their debts without the need of winding up the debtorcompany It is a useful tool to reorganize the company as it provides for a statutory form (by way of acourt order) by which affected creditorsshareholders may agree to a scheme which if approved by thecourt will bind any dissenting creditorsshareholders If a company is subject to a scheme ofarrangement the management usually retains control although its management will be bound by thescheme and court sanction


No


No

3 Creditor issues


All Secured debts are to be paid in priority to all unsecured debts in a winding up In order of prioritythe unsecured creditors are last to be paid and may only recoup the monies outstanding after payment tothe secured creditors


A secured creditor has a few options

a) Subject to the terms of a chargepledgemortgage he may selldisposerealize his security to satisfythe debt which is due to him if the proceeds are insufficient to cover the amount due he may commencelegal proceedings for any deficiency

b) He may appoint a receiver and manager pursuant to the terms of a debenturesecurity documentationto secure and enforce its rights


Subject to the terms of the security documents secured creditors may the right to set off such monies andmutual claims in the possession of the creditors




No unless any affiliated company has given a guarantee or a security for the benefit of the companyEach company is a separate legal entity


226

At the creditors meeting a committee of inspections may be appointed at the discretion of the creditorsthat may or may not consist of creditors The committee has a role is to supervise the liquidator



In a winding up scenario the control of all the property of the company vests in the liquidator orprovisional liquidator

In scheme of arrangement commonly the management of the company


In a winding up - shareholdersrsquo advance and existing creditors

In a liquidation ndash no financing available all assets of company realized


No DIP funding equivalent pursuant to Malaysian laws even under its the equivalent scheme ofarrangements the company is funded by shareholdersrsquo advance and existing creditors


In a voluntary winding up it was held in the English Case of Midland Counties District Bank v Attwood[1905] 1 Ch 357 that a resolution for the voluntary winding up of a limited company did not operate as anotice of discharge to the employees of the company This is however depending on the facts and timingof each particular case If the employment were conditional upon the continued existence of a companythen the employment would cease automatically when it is wound up

Pursuant to Malaysian Companies Act 1965 in a winding up these shall be paid in priority of all otherunsecured debts

(a) all wages or salary (whether or not earned wholly or in part by way of commission) including anyamount payable by way of allowance or reimbursement under any contract of employment or award oragreement regulating conditions of employment of any employee not exceeding one thousand fivehundred ringgit or such other amount as may be prescribed from time to time whether for time orpiecework in respect of services rendered by him to the company within a period of four months beforethe commencement of the winding up

(b) all amounts due in respect of workers compensation under any written law relating to workerscompensation accrued before the commencement of the winding up

(c) all remuneration payable to any employee in respect of vacation leave or in the case of his death toany other person in his right accrued in respect of any period before the commencement of the windingup

(d) all amounts due in respect of contributions payable during the twelve months next before thecommencement of the winding up by the company as the employer of any person under any written lawrelating to employees superannuation or provident funds or under any scheme of superannuation or

227

retirement benefit which is an approved scheme under the federal law relating to income tax


As from the commencement of winding up the company must cease to carry on its business except in sofar as is in the opinion of the liquidator required for the beneficial winding up thereof The corporatestate and corporate powers of the company shall continue until it is dissolved Any transfer mortgagedelivery of goods payment execution or other act relating to property made or done by or against acompany shall be void or voidable (Section 293(1) Companies Act 1965) Any disposition of thecompanyrsquos property made after the commencement of the winding up will be void (S 223 CompaniesAct 1965) Any transfer of shares unless made to or with the sanction of the liquidator and anyalteration in the status of the shareholders made after the commencement of the winding up shall be void(Section 256(2) Companies Act 1965)



In a winding up by the Court every creditor shall prove his debt unless the Judge in any particularwinding up shall give directions that any creditors or class of creditors shall be admitted without proof

In a scheme of arrangement the every creditors are similarly required to prove his debt


The declaration proving debt must be filed by the creditor within 3 months after the winding up order ismade As the proof of debt is filed electronically the documents substantiating the claim specified in theproof of debt must be sent to the Official Receiver within 14 days from the date of submission of theproof of debt


In a winding up the following shall be paid in priority to all other unsecured debts

i Costs and expenses of the winding up

ii All wages or salary

iii All amounts due in respect of workerrsquos compensation (relating to workerrsquos compensation accruedbefore the commencement of winding up)

iv All remuneration payable to any employee in respect of vacation leave v All amounts due in respectof contributions payable during the 12 months before the commencement of the winding up as theemployer relating to employees superannuation or provident funds and

vi Amount of all federal tax (Section 292 of Companies Act 1965)


No

228



Cram-down Procedure in the United States is similar to the scheme of arrangement under Section 176 ofthe Companies Act (explained above)


The procedure of scheme of arrangement involves the following

(i) The company proposing the scheme of arrangement must seek a court order convening creditor andorshareholders meeting in order to vote on the proposed scheme

(ii) A meeting or meetings are convened at which the attendees are separated into classes and will berequire to vote on the proposed scheme of arrangement At least 50 in number constituting 75 invalue of each relevant class of creditors must vote in favour of the scheme for it to proceed to sanction

(iii) A class must not be confined to those persons whose rights are not so dissimilar as to make itimpossible for them to consult with a view to their common interest

(iv) Once the scheme of arrangement has been approved by the requisite majority of each class thecompany will apply to the court and request that it sanction the scheme of arrangement

(v) The scheme of arrangement will become effective upon delivery of the relevant sanction order by thecourt to the Companies Commission of Malaysia and will bind all creditors of each relevant class


In the ranking of creditors to be paid unsecured creditors are very low This means that there is a strongpossibility that there are not enough funds from the liquidation to satisfy the debts owed to thosecreditors



No


No



No Only Malaysian legislation applies

229


Where a company had borrowed in foreign currencies and all financing documents and securityagreements are subject to foreign laws then the company will have to comply and lenderscreditorswould have to take actions pursuant to those foreign laws to recover its debt The enforcement of theorder in Malaysia are further subject to various laws including whether the foreign sovereign andMalaysia has a reciprocal arrangement

230

Mauritius

Raffeek Sham Principal of LI SHAM amp SEEAM

raffeekshamadvisersmu tel +230 211 3399

Overview

bull The Insolvency Act 2009 (ldquothe Actrdquo) is the main enactment governing insolvency proceedings andrelated matters in Mauritius

bull The Act came into effect on 1 June 2009 and applies to both individual and corporate insolventdebtors insolvency of banks financial institutions and insurance companies is however catered forunder separate enactments namely the Banking Act 2004 and the Insurance Act 2007

bull The Bankruptcy Division of the Supreme Court retains jurisdiction to deal with all insolvency mattersexcept for Cross Border Insolvency matters (Part VI of the Act) which are to be dealt with by theCommercial Division of the Supreme Court

bull The other relevant legislative texts are the Companies Act 2001 (ldquoCA 2001rdquo) and our French-inspiredCode Civil Mauricien (ldquoCCMrdquo) Code de Commerce (ldquoCDCrdquo) and the Code de Procedure Civile(ldquoCDPCrdquo)

bull Except where otherwise stated all listed sections below are references to the Act



The following options are available-

(i) mortgage

(ii) fixed or floating charge

(iii) ldquogagerdquo eg vehicles and equipment leasing other forms of privileged debts in favour of approvedinstitutions (banks and lending institutions)

(iv) right of set-off provided under section 309

(v) deposit of a share or debenture certificate

(vi) pledge of shares or debentures

(vii) charge on a ship or aircraft

(viii) attachment on the proceeds to be paid by the Sugar Syndicate and

(ix) lien or retention of title

231


Yes ndash the following instances may be noted-

(a) Voidable preference

A transaction undertaken by the debtor at the time it was unable to pay its debts and which would enableanother person to receive more in satisfaction of that debt than would have been the case in aliquidation Such a transaction may be set aside by the Court on the application of the Official Receiveror a liquidator where it was made within 2 years immediately before commencement of the winding up

(b) Voidable charge

A charge over any property or undertaking of a debtor may be set aside where (i) the charge was givenwithin 2 years immediately before the commencement of the winding up and (ii) immediately after thecharge was given the debtor was unable to pay its due debts

(c) Intention to defraud a creditor

A disposal of property made by a debtor within 5 years immediately before the commencement of thewinding up of the debtor with intent to defraud a creditor may likewise be set aside (except for apurchaser in good faith not having at the time of the alienation notice of the intention to defraud anycreditor)

(d) Voidable gift

A gift by a debtor to another person may be set aside where (i) the debtor made the gift within 2 yearsimmediately before the commencement of the winding up and (ii) the debtor was unable to pay his or itsdue debts immediately after making the gift

(e) Transactions with directors

A transaction entered into by the company in which a director is interested may be avoided by thecompany at any time before the expiration of 6 months after the transaction is disclosed (except wherethe company has received fair value or the transaction was undertaken at armrsquos length or the constitutionprovides otherwise)

(f) Inadequate or excessive consideration

Related partiesrsquo transactions undertaken by the debtor during the period of 2 years before thecommencement of winding up may be the subject of challenge where the Official Receiver or Liquidatorconsider such transactions have been conducted for inadequate or excessive consideration Transactionstargeted include acquisition or disposal of a business or property acquisition or provision of servicesprovision of a guarantee or issue of shares for benefit of the related party

(g) Other matters

These may include failure to comply with prescribed formalities eg failure to insert in instrument ordeed the exact prescribed wording of indebtedness or failure to obtain any pre-requisite governmentapproval(s) for certain transactions could render security instruments defective


232

(a) Section 162 CA 2001

A director who believes that the company is unable to pay its debts as they fall due must call a meetingof the Board to consider whether a liquidator or an administrator should be appointed Failure to do somay render the director liable for the loss suffered by creditors where the company (i) was unable topay its debts at the time of such failure and (ii) was subsequently put into liquidation on account ofhaving continued trading while in distress

(b) Other liabilities

(i) The directors including a past director may be liable to criminal prosecutions where during the 12months preceding the winding up (or any time thereafter) they have engaged in any conduct involvingfraud dishonesty misrepresentation making false statement or other prohibited dealings

(ii) Where a director of a company in receivership fails to settle dues in respect of PAYE NationalPensions Fund Training Levy Workfare Programme Fund on the due date that person shall bepersonally liable for the total amount due including all penalties charges and interests thereon

2 Taking action


(a) Administration

The Administration process is a short term mechanism aiming to keep the company or as much aspossible of its business in existence or should that not be possible for a better return to be achieved forits creditors and shareholders than would result from the immediate winding up of the company

This process basically involves choosing within a set time-frame one of three options ie whether itwould be in the creditorsrsquo interest for-

(i) the company to execute a deed of company arrangement (ldquoDOCArdquo)

(ii) the administration to end or

(iii) a liquidator to be appointed

(b) Winding up by the Court

A company may be wound-up by order of the Court a petition for winding up may be presented by thecompany a shareholder a contributory a creditor a liquidator the Director of Insolvency Service or theFinancial Services Commission

(c) Members winding up

A membersrsquo winding up may only be effected where the company is solvent the liquidator is appointedby special resolution] A company may otherwise (section 137) be wound up by ordinary resolution ofits members where the period if any fixed for its duration by its constitution expires or the event ifany occurs on the occurrence of which the constitution provides that the company is to be dissolved


233

Where the company is insolvent the directors may upon lodging the statutory declaration of insolvencyappoint a provisional liquidator and should convene meetings of members and shareholders forconfirmation or replacement of the provisional liquidator

(e) Appointment of Receiver

A secured creditor may pursuant to the terms of the charge instrument appoints a receiver over thecharged assets of the debtor company ndash the main task of the receiver is to realize or sell the chargedassets and (subject to any preferential claims) apply the net proceeds in satisfaction of the chargeersquosclaims


(a) In January 2013 the Companies Division issued the Out-of-Court Guidelines for Restructuring(endorsed by the Central Bank) which outline the following rescue avenues-

(i) bilateral work-out involving the debtor and a creditor leading to the rescheduling of paymentsandor debt forgiveness

(ii) multilateral negotiations between the debtor and its major creditors leading to debtrescheduling debt forgiveness or the granting of other incentives as agreed by the parties

The Guidelines emphasize the need for a breathing period (Standstill Period) to allow for a viable planto be put in place while existing credit lines are maintained creditors do not take any enforcementaction and debtor does not act in manner which adversely affect creditors

(b) Consideration may also be given to any Government schemes (eg Forex Loan Facility by CentralBank ldquoIndustrial Sick Unitsrdquo etc) which may exist to protect and support employment in a particularindustry sector or category (SMEs)


(a) The formal procedures attempt to strike a fair balance in conferring some form of ldquoequalityrdquo oftreatment to the three main stakeholders

(i) government - highest amount due for any one of four years preceding winding up being rankedamong priority claims provided such government debts have been inscribed on an annual basis

(ii) employees - one monthrsquos wages (capped at Rs30000 approx USD1000 per employee) priorto winding up likewise among priority claims and

(iii) lenders - fixed and floating charges (registered for more than three years) ranking pari passuwith remaining claims of employees but before other classes of creditors (including remaininggovernment claims under (i) above)

(b) The informal processes may be considered to be creditors-led and should provide scope for theparties to come up with flexible and pro-business solutions (often with government active support orincentive)


(a) Solvency test

234

Where the company does not satisfy the test (assets greater than sum of its liabilities and stated capital)and is unable to pay debts in normal course of business the directors must act (section 162 CA 2001) toconsider administration or liquidation or continue operations

(b) Inability to pay its debts

A company is presumed to be unable to pay its debts as they become due in the ordinary course ofbusiness where ndash

(i) the company has failed to comply with a statutory demand

(ii) execution issued against it in respect of a judgment debt has been returned unsatisfied

(iii) a person entitled to a charge over all or substantially all of its property has appointed areceiver under the instrument creating the charge or

(iv) a compromise between the company and its creditors (CA 2001) has not been approved

(c) Other grounds for winding up

A petition for winding up may be presented where (inter alia) ndash

(i) the directors have acted for their own interests against shareholdersrsquo interests or in a mannerunfair or unjust to the shareholders

(ii) the directors or managers have acted to conceal or remove assets of the company outside thejurisdiction with intent to defeat creditors

(iii) an inspector (appointed under the CA 2001) reports that it is in the interests of the public or ofthe shareholders or creditors that the company should be wound up

(iv) a bank has carried on business in Mauritius in contravention of the Banking Act 2004

(v) an insurance company has carried on business in Mauritius in contravention of the InsuranceAct or the Financial Services Act 2007

(vi) a licensee of the Financial Services Commission has carried on business in contravention ofthe Financial Services Act 2007 or the Securities Act 2005


(a) Insolvency Practitioners (administrators managers liquidators receivers) must be registered withthe Insolvency Service

(b) They must lodge copy of their appointments and situation of office (and any subsequent changesthereof notice of their removal resignation replacement) with-

(i) the Insolvency Service

(ii) the Official Receiver

(iii) the Registrar of Companies

(c) They must-

235

(i) give public notice of their appointments in the Government Gazette and daily newspaper(s)

(ii) give public notice of meetings of members contributories and creditors

(iii) submit six-monthly statutory reports and accounts of the winding up to the Insolvency Serviceand the Official Receiver

(d) A petitioner who obtains a winding up order from the Court must lodge a copy of the order togetherwith the name and address of the Liquidator with the following-

(i) Director of Insolvency Service

(ii) Official Receiver

(iii) the secretary of the company or as the Court directs and

(iv) the liquidator


(a) Administration

(i) the company

(ii) a secured creditor having charge over wholesubstantially whole of companyrsquos property

(iii) the liquidator or a provisional liquidator

(iv) the Court or

(v) Supervisory Committee (for prescribed designated companies)

(b) Winding up by Court

(i) the company

(ii) a contributory (or heirestate of a deceased contributory)

(iii) a shareholder

(iv) a creditor including a contingent or prospective creditor of the company

(v) a liquidator

(vi) the Director of Insolvency Services or

(vii) the Financial Services Commission`

(c) Membersrsquo winding up

The directors should make the statutory declaration of solvency and shareholders pass required specialresolution appointing the liquidator


236

The directors must file the statutory declaration of insolvency appoint a provisional liquidator andconvene meetings of creditors to confirm provisional liquidator or otherwise appoint some other personas liquidator

(e) Receivership (section 183)

(i) the charge holder or

(ii) the Court


(a) The Court retains overall supervision of administrations receiverships and all forms of winding upincluding the power to control insolvency practitioners in the discharge of their duties

(b) There is general power of the Court to deal with various issues including power to consider andmake a pronouncement on any irregularity in proceedings to hear any party who may be aggrieved bythe acts of an administrator receiver or liquidator and grant such relief as the Court may considerappropriate

(c) The administrator receiver provisional liquidator or liquidator may also seek directions from theCourt Furthermore no action shall be proceeded with or against a company without the leave of Courtwhere a provisional liquidator or administrator has been appointed or a winding up order made


Depending on the size of organisations nature of operations and other factors the process may well lastfrom a few weeksmonths (straight forward cases) to several years for more complex situations (eginvolving overseas recovery of assets and litigations)


(a) Please refer also to matters listed above under Section 2 (Taking Action) sub-heading What is theprocess for filing

(b) The Insolvency Practitioners must display clearly in all correspondences notices or other documents(including every agreement or deed executed while holding office) that the company is ldquoInAdministrationrdquo ldquoIn Receivershiprdquo ldquoIn Provisional Liquidationrdquo or ldquoIn Liquidationrdquo as appropriate

(c) A secured creditor who appoints an administrator under section 215 shall give written notice of theappointment to the company as soon as practicable and in any event before the end of the next workingday


(a) Any attachment sequestration distress or execution put in force against the assets of a company afterthe commencement of a creditorsrsquo winding up shall be void

(b) After the commencement of a winding up no action or proceeding shall be proceeded with orcommenced against the company except by leave of the Court and subject to such terms as the Courtthinks appropriate

(c) A transaction or dealing by a company in administration or by a person on behalf of the companythat affects the companyrsquos property is void unless the transaction or dealing was entered into by or with

237

consent of administrator or under Court order


This process does not seem to exist in Mauritius proceedings


Insolvency proceedings are court-supervised mechanism

In high profile cases (large factories or some particular sector) the political class being sensitive toneed for preserving jobs may involve government agencies (eg Development Bank of Mauritius StateInvestment Corporation Business Parks of Mauritius Stimulus Package or other similar schemes) tointervene by providing concessionary financing rescheduling existing debts or waiving dues orpreferential claims or Minister in charge may secure work-out solutions with lenders employees andother stakeholders

3 Creditor issues


Unsecured creditors stand last in the queue for any winding up dividend

There are a few exceptions like (a) rent due six-months prior to winding-up (b) rent due for period ofoccupation during winding-up and (c) suppliers of essential services


Where permitted under the charge instrument the secured creditor may appoint a manager or receiverand manager to take possession of and realize the charged assets in satisfaction of the creditorrsquos claim


(a) Where there have been mutual credits mutual debts or other mutual dealings between the companyand another person the right of set-off is available so that only the balance of the account may be provedor payable to the Official Receiver or Liquidator as appropriate

(b) The right of set-off will not be available with respect to transactions entered into between thecompany and

(i) any party during the period of 6 months preceding the commencement of a winding up

(ii) a related party during the period of 2 years before the commencement of a winding up

unless that party or related person as the case may be proves that at the time of the transaction they didnot have reason to suspect that the debtor-company was unable to pay its debts as they became due


Related partiesrsquo transactions not undertaken at armrsquos length or in breach of the Act or other enactmentmay be subject to challenge

238


Article 1166 of CCM allows a creditor to sue the debtors of its debtor in an action to recover its dues(but this right would not be available where the debtor-company is in administration receivership orwinding up)


(a) The appointment of a committee of inspection is a usual ldquofixturerdquo in a court or voluntary winding upor an administration It is composed of representatives of the creditors and members or contributories ofthe company

(b) The main functions of the committee include the following

(i) generally monitoring the progress of the winding up

(ii) fixing the remuneration of the liquidator

(iii) authorizing the liquidator to pay any class of creditors in full

(iv) authorizing liquidator to sell or dispose property of the company

(v) sanctioning payment (or postponement thereof) of interim dividend

(vi) generally consult with the administrator liquidator or official receiver

(vii) receiving and considering reports by the administrator liquidator or official receiver



The administrator receiver manager provisional liquidator or liquidator as the case may be will havecustody and control of the company and business under the overall supervision and direction of theCourt


(a) See also under sub-heading Are there political factors coming into play under section 2 (TakingAction) above

(b) In some major insolvencies (factories with thousands employees) the lenders may grant workingcapital (ranking pari-passu with their existing debts) to sustain operations and honour order bookcommitments

(c) Quite infrequently finance may be arranged under the sanction of the Court who may imposeconditions as it deems fit


This mechanism is not known in Mauritius

239


(a) No automatic termination of employees contract

(b) AdministratorLiquidator liable for payment of wages or salary that accrue under contract ofemployment entered into before the administratorrsquosliquidatorrsquos appointment unless lawful notice givenfor termination of said contract

(c) Receiver liable for payment of wages or salary that during the receivership accrue under a contractof employment relating to the property in receivership and entered into before his appointment unlessnotice of termination is lawfully given within 14 days (or longer period granted by Court) after the dateof appointment

(d) Employeesrsquo rights and claims otherwise governed by provisions governing Preferential Claims(Fourth Schedule)


Supply of essential services (water electricity and telecoms) cannot be interrupted during insolvency onaccount of dues predating commencement of insolvency or administration

Administration

(a) The Administrator has powers of company and officers and may terminate contracts


(c) No enforcement of charge without consent of administrator or the court

(d) Taking possession of leased property not allowed without consent of administrator or the court

(e) No enforcement of guarantee given by a director

(f) DOCA binding (irrespective of existing contracts) on company its officers shareholders the deedadministrator and all creditors

Liquidation

(a) Liquidator has power to determine contracts including terminating employment contracts


(c) Right of a secured creditor not affected (subject to the priority of claims) to take possession of andrealise or otherwise deal with property of the company over which that creditor has a charge

Receivership

Receiver liable for rent and any other payments becoming due under an agreement subsisting at the dateof his appointment relating to the use possession or occupation by the chargor of property inreceivership ndash the dues under such contracts will run from 14th day after appointment up to the datewhich is earliest on which use possession or occupation or receivership ends

240



(a) The proof of debt must be verified by an affidavit which shall

(i) contain a statement of account showing the particulars of the debt

(ii) specify the vouchers if any by which the same can be sustained and

(iii) state whether or not the creditor is secured whether inscription has been made or not

(b) A creditor whose proof of debt has been rejected may apply to the Court for an order modifying orreversing the decision such an application must be made within 15 working days after the creditorreceives the notice of rejection (or within such extended time that the Court allows)


(a) Every creditor shall prove his debt as soon as may be after the commencement of a winding up Inpractice creditors are invited by public notice to submit their claims by a set deadline date

(b) The Court may fix a date on or before which creditors are to prove their debts or claims after whichdate they will be excluded from the benefit of any distribution made before those debts are proved


The following order of priority applies

(1) Costs of liquidation (including fees expenses rent incurred after commencement of winding-upcosts of essential suppliers and remuneration)

(2) Amounts due and unpaid to government and its agencies (VAT income tax registration duty customsduty) during the four years preceding commencement of winding up but (a) limited to highest amount forany one of those four years and (b) provided relevant inscription has been effected

(3) Wages and salaries due to employees for one month before commencement of winding up (limited toRs30000 per employee) and any claim for lien (limited to Rs20000)

(4) Costs of compromise with creditors under section 260(c) CA 2001

(5) (a) Amount due and payable in respect of first ranking fixed and floating charges inscribed for morethan 3 years

pari passu with

(b) Payment for termination of employment under Employment Rights Act 2008 and any compensationfor unjustified dismissal which accrues or crystallises before completion of winding up

(6) Landlord special privilege any rent due and unpaid for period of 6 months precedingcommencement of winding up

(7) (a) First ranking fixed and floating charges inscribed for less than 3 years

(b) The amount payable under any inscribed charge or mortgage other than a first ranking fixed and

241

floating charge or mortgage

(8) Claims of victims of accident

(9) Other privileges securities and creditors (including costs for debtorrsquos assets and privileges forarchitects and builders)

(10) Amounts due to Government and its Agencies in relation to amounts due and unpaid for taxescharges and dues which are due and unpaid for the period not exceeding four years prior to the date ofcommencement of the winding up and which has not been paid under item (2) above

(11) All other unsecured creditors who have proved in the winding up (including judicial costs andCourt fees funeral expenses)


The peculiarities of cross border insolvency and netting in financial contracts may be noted



The objective of a cram-down procedure may be achieved where a duly approved DOCA is executedunder the administration regime


(a) Administration - comes to an end where

(i) the creditors so resolve

(ii) DOCA is executed

(iii) a liquidator is appointed

(iv) time-limit for holding the watershed meeting of creditors expires

(v) the Court makes an order to that effect

(b) Voluntary winding up comes to an end where

(i) companyrsquos assets have been fully realized

(ii) any final dividend distributed

(iii) contributories rights adjusted as appropriate

(iv) any final return made to contributories

(v) account showing how winding up conducted and property realized submitted and

242

(vi) the Court makes an order to dissolve the company

(c) Receivership is concluded when

(i) the charged assets have been realized

(ii) proceeds applied in payment of charge holder (subject to any preferential claims)

(iii) submission of final report (summarizing statement of affairs conduct of receivership amountsreceived and paid any amounts owed to secured and unsecured creditors)

[The company would then return under control of directors or may be put into liquidation]


(a) Compromise with the creditors (section 254 CA 2001) for restructuring of companyrsquos debts (egcancelling all or part of the debts varying creditorsrsquo rights or debts terms) and which will be binding onthe company and all creditors if the plan is duly approved by the creditors in accordance with section256 CA 2001

(b) Scheme of arrangement (section 261 CA 2001) for reorganization of companyrsquos share capital (egdebt for equity swap) and Court may make order for arrangement to be binding on such class of personsas it may consider

(c) Amalgamation (section 244 of CA 2001) with another or more entities pursuant to which thesurviving entity takes over the liabilities debts obligations property and rights of the individualamalgamating debtor companies



Part VI of the Act provides for an effective mechanism to deal with Cross Border Insolvency (CBI)issues based on the UNCITRAL Model Law This Part VI is yet to be proclaimed to come into force


(a) Part VI and the accompanying Ninth Schedule (containing the detailed rules) are based on thefollowing principles

(i) Access of foreign representatives and creditors to courts in Mauritius

(ii) Recognition of a foreign proceeding and relief

(iii) Co-operation with foreign courts and foreign representative

(iv) Cooperation and coordination of concurrent proceedings

(v) Public policy exception

243

(b) Part VI contains reciprocity provisions in relation to recognition of foreign proceedings

(c) In the implementation and interpretation of the CBI provisions regard to be had to the following-

(i) their international origin and the need to promote uniformity in their application and theobservance of good faith

(ii) reference may be made to the Model Law and any document that relates to the Model Law andoriginates from the United Nations Commission on International Trade Law or its working groupfor the preparation of the Model Law

244

Mexico

Alfonso Villalva Partner Bufete Villalva Abogados

wwwvillalvacom email avpvillalvacom tel +52 55 5257 4994



Typically the creditors could request to the Judge in the liquidation phase of a Company to take thenecessary remedies to secure the assets such as

(i) Prohibition of payment of obligations due prior to the date of acceptance of the claim or bankruptcylawsuit

(ii) The suspension of any foreclosure proceeding against assets or rights of the company or individual

(iii) The prohibition to perform remedy actions or encumbrance of his company main assets

(iv) The seizure of assets

(v) The prohibition on transfers of assets or securities to third parties

(vi) The order to embed the individual for the sole purpose to not left his domicile without leave


No as such transaction if executed on a binding document should be fulfilled in all its terms


Directors of a company might be held liable to civil administrative actions or even to criminal liabilityin the event of fraudulent acts

If the company has not been declared insolvent by a competent court the directors will not be liable andthey shall continue the operation of a company under financial distress

2 Taking action

What formal and informal procedures are available for the company

In Mexico there are several actions available prior to a formal insolvency proceedings such asforeclosure restraining orders preliminary discovery or pre-filing motion which depends on the type ofagreement and the action could be followed civil mercantile ndashordinary or special The Bankruptcy Lawprovides for a single insolvency proceedings which consists in two main stages the conciliation stageand bankruptcy stage (and a liquidation process if assets are available)

245

It does not provide different insolvency proceedings for individuals and companies nor does it makedistinction between preventive insolvency proceedings and actual insolvency proceedings


The conciliation stage in a Bankruptcy trial encourages binding and reorganizing an agreement betweenthe debtor and its creditors and thus avoiding the debtorrsquos bankruptcy or liquidation The conciliationstage may not last more than 185 calendar days unless extended for up to two additional consecutiveperiods of 90 calendar days each however that in no event shall the conciliation stage last more than365 calendar days

Once the insolvency of the debtor has been declared the conciliation stage begins and tries to find asolution to allow the debtor and creditors to come to an agreement A conciliator who initially acts asan intermediary between the company and its creditors must direct this procedure

The conciliator shall act as an intermediary among the parties One of the functions or powers ofconciliator is to recognize claims based on the debtorrsquos accounting records in order to streamline theclaim recognition process The conciliator will also collaborate in the decision regarding whether thebusiness will continue to be operated by debtorrsquos restructuring the debt or whether it is necessary toremove existing management from the operation of the company

The main purpose of the conciliation stage is to preserve the operation of the debtorrsquos business Theconciliator is responsible to publish the deadline for creditors to submit proofs of claims processingproofs of claims serving as a mediator among the debtor and creditors and to propose a restructuringplan to the court


In Mexico insolvency may be declared if a company or individual has generally failed to perform anydebtor obligation The Bankruptcy Law establishes that a debtor may be declared insolvent in casessuch as

(i) It has defaulted its obligations contracted with two or more different creditors

(ii) The obligations of the debtor which have been due for at least 30 days represent at least 35 percent or more of all the debtorrsquos obligations on the date on which the demand or insolvency petition isfiled (or depends or both if it was an involuntary or voluntary petition respectively

(iii) The debtor does not have any of the following assets in an amount sufficient to perform at least 80per cent of its obligations due on the date on which the demand or insolvency petition is filed cash anddemand deposits term deposits and investments becoming exercisable or maturing in a term no longerthan 90 calendar days following the date on which the demand or insolvency petition is filed before thecourt securities or negotiable instruments available at the relevant markets which may be sold within aterm of 30 business days with a known value on the date on which the demand or insolvency petitionwas filed before the court


The bankruptcy trial has three stages the bankruptcy trial the conciliation and the liquidation

(i) In the first stage the Judge and the Auditor reviews whether the eligibility requirements are met bythe debtor and issues the Order for Relief or denies the request

246

(ii) In the second stage the Conciliator must determine who the creditors are and acts as a mediatorbetween the debtor and its creditors to propose a reorganization plan

(iii) Then if no plan is reached and the case proceeds to a liquidation the Trustee must sell the assetsand pay creditors


A company or individual who request bankruptcy and any creditor or the Attorney General can file aBankruptcy lawsuit

A debtor may commence a voluntary reorganization proceeding under the Bankruptcy under theseconditions

(i) a payment default has occurred with respect to the claims of at least two creditors

(ii) payments are past due for more than 30 days and represent 35 or more of all the debtors paymentobligations as of the date of the filing andor

(iii) the debtor does not have liquid assets to pay at least 80 of the obligations past due as of the dateof the filing

A creditor whether unsecured or privileged or the Attorney General can file an involuntaryreorganization proceedings under the Bankruptcy Law only if the abovementioned these conditions areaccomplished


The Judge controls the bankruptcy proceedings and has the faculty to comply with the MexicanBankruptcy Law A case under the Bankruptcy Law will be assigned to a district judge which is Federaland he shall oversee the reorganization and bankruptcy proceedings


The conciliation period lasts 185 days the Conciliator or the creditors representing two-thirds of theamount of the recognized claims may request the first 90-day extension if they reasonably believe areorganization plan is achievable The second 90-day extension must be sought by both the debtor and90 of recognized creditors In no event may the conciliation last more than 365 days

Once the Court publishes the list of recognized claims the Conciliator is required to attempt to reach anagreement with the debtor and holders of recognized claims on a plan of reorganization

If the Conciliator believes that the debtor and a majority of holders of recognized claims support a planof reorganization for the debtor it must circulate the plan to all holders of recognized claims Suchholders will have ten business days to comment on the plan

About the insolvency period there is no time limitation The time depends on the amount of work of theauthority and the actions during the process


(i) Lawsuit or request

(ii) Admission

247

(iii) Notification

(iv) Eligibility review

(v) Bankruptcy claim

(vi) Conciliation phase

(vii) Liquidation phase

(viii) Order for liquidation

(ix) Creditor payments

Each one on the above mentioned steps have their own specifications procedures and notifications


(i) Request a bankruptcy and all its effects

(ii) To be declared as liquidation phase once all the formalities of the process have been completed


During the phase of conciliation the debtor may continue its ordinary course with a conciliatorreviewing the debtorrsquos operations and keep the management and possession of the assets unless theconciliator asks or justifies the removal of the same in such case the manager and the keeper of theassets will be the conciliator

Once the liquidation phase has finished the receiver will replace the company or individual and willtake the management and possession of the assets

In the event the debtor is removed from the management of its business the conciliator will become theadministrator and will be granted full authority to conduct the business on the understanding that theauthorities of the debtor and its decision-making committees shall cease


No the bankruptcy law in Mexico is of Federal application


Legally there is no intervention or participation from politics however the law and the Bankruptcy Laware subject to be reformed by the Congress which has political interests

3 Creditor issues


They are the last ones in collecting their credits

248


In the conciliation phase the warranties cannot be executed however the creditors should request theacknowledgments of their credits within the terms stipulated on the Bankruptcy Law and be recognizedby the Judge order

Once the liquidation phase has been settle down the creditors with warranty could collect from theprivileged creditors the product of the assets under credit warranty


After the date on which the Order for Relief is entered only the following claims may be set off

(i) Any rights in favour of and obligations owed by the debtor arising out of the same transaction unlessthe transaction is terminated by operation of law as a result of the Order for Relief

(ii) Any rights in favour of and obligations owed by the debtor that became due before the Order forRelief where the setoff is authorized under applicable law and any tax refunds to and tax claimspayable by the debtor


All the credits take effect and prevail until the liquidation and the consequence of the alienation of theassets to be paid nevertheless it should be taken into consideration for its payment the payment priorityand the creditor


No


A creditor committee cannot be established The law only allows the creditors that represent at least10 of the amounts of the credits in charge of the company or individual to make a petition to the Judgeto name a controller which will represent the interests of the creditors and will guard the functions of theconciliator receiver and the acts of the company or individual



The Conciliator acts as mediator between the debtor and its creditors and is responsible for preparing areorganization plan In addition the Conciliator monitors the administration of the company and presentsthe list of creditors to the judge The Trustee is appointed in the same manner as the other twospecialists when the judge gives notice that the liquidation phase has begun

The Trustee is entrusted with selling the assets of the estate in the event conciliation fails and the caseproceeds to liquidation It is not uncommon for the Trustee to be the same person designated asConciliator

249


By ordinary operations which includes essential expenses


In Mexico a debtor may similarly fund its operations through post-petition financing a new lenderhowever cannot be secured by a priming lien on encumbered property


The rights of the employees will be ensured for purposes of payment taking preference of all othercreditors


The validity of the agreements will not be affected under personal assets patrimonial or assets relativeto property or rights which management and disposal will be kept by the company or individual and theywill be indefeasible non-lassalle and inalienable

The effects under the agreements are established on the Title III Chapter V and Section II of theBankruptcy Law



(i) Oppositions Filed in the distinct phases of the processes considering the rules established on theBankruptcy Law

(ii) Appeal against the order of relief by the creditors controller the Attorney General or the auditor

(iii) Appeal of the order of liquidation by the company or individual by a recognized creditor or by theconciliator


The timing to file a claim has three opportunities

(i) within 20 days following the date of the publication of the Order for Relief

(ii) within five days of the filing of a provisional list of creditors by the Conciliator or

(iii) within nine days of issuance of the Order of Recognition Ranking and Preference of Claims


(i) Oppositions and

(ii) Appeal


250

Since it is a judicial proceedings the scenarios could be changed depending on the actions taken by thecreditors the company or individual and the controller and from the compliance of the auditorconciliator and the receiver obligations



They are not foreseen on the Bankruptcy Law

How the procedure is formally concluded

The Bankruptcy trial concludes by an order of relief by the Judge when (i) a plan is confirmed by theJudge (ii) the creditors received all their pending payments (iii) payments to creditors have been madethrough a Bankruptcy fee which corresponds to the obligations of the company or individual and nomore assets be left (iv) it is proved that the state is insufficient to cover all the credits against the state(v) the company or individual approved a plan and recognized the total of the creditors in the liquidationphase (vi) the company or individual and the creditors made a request


Creditors will collect in this order (i) Privileged creditors (ii) secured creditors (iii) creditors withspecial privileged and (iv) unsecured creditors



None available


None available



The company only recognizes the Bankruptcy Law or any other foreign procedure content of theBankruptcy Law Nevertheless the Bankruptcy Law does allow for the reorganization of branches andsubsidiaries of foreign


The Bankruptcy Law recognizes enforcement and foreign procedures in Mexico Their rules andrequirements are indicated in the same Law nevertheless foreigners could request in Mexico to open aBankruptcy trial

251

252

The Netherlands

Stephan van de Kant Partner Wieringa Advocaten

wwwwieringanl email vandekantwieringanl tel +31 20 624 68 11



Mortgage over real estate (notarial deed) mortgage over sea ships (notarial deed) mortgage overrestricted rights of real estate and sea ships (notarial deed)

Pledge over movable assets (physically handing over assets or privately executed deed) pledge overclaims and other rights against third parties (privately executed deed) pledge over intellectual propertyetc (privately executed deed)

Lien over any of the above assets either preliminarily or after judgment has been passed

Netherlands law is not familiar with floating charges


Transactions may be vulnerable to the actio pauliana which can be invoked by either a single creditoror a bankruptcy receiver in cases such as

(i) wrongful or fraudulent trading

(ii) transactions at an undervalue

(iii) transactions defrauding creditors or

(iv) preferences

Also fraudulent set offs may be voidable


Directors have a duty to act in the interests of creditors when a company is facing insolvency or isinsolvent Directors could face liabilities for example for wrongful or fraudulent trading misleadingannual accounts non- or late filing of annual accounts not properly keeping the books of the companyentering into agreements which the director knew the company could not perform wilfully makingperformance of an agreement impossible

2 Taking action


253

The Bankruptcy Act (BA) recognises three different types of judicial insolvency proceedingsBankruptcy Moratorium and Debt Restructuring In the Netherlands all three types are included inAddenda A B and C to the European Insolvency Decree (EC) no 13462000 of 29 May 2000 L 160(changed in January 2005 COM 2004 827)

Bankruptcy

The appointed receiver(s) has a duty to sell the companyrsquos assets for the benefit of the joint creditors Ifthe highest profit can be realised by selling the enterprise as a whole the receiver will try thisOtherwise he will sell the assets in part The directors of the company may try to avoid the winding upof the company by coming to an arrangement with the creditors through the court

Moratorium

An administrator is appointed Ordinary creditors no longer have the right to sell the companyrsquos assetsHowever preferred creditors keep that right if they have a judgment against the company Moratoriumproceedings are usually unsuccessful Most of them end in bankruptcy after a few days or weeks

Debt restructuring for Natural Persons

If a natural person is unable to reach an amicable agreement with his creditors he can request thedistrict court in his place of residence to draw up a debt management scheme based on the Debtrestructuring for Natural Persons Act (Wet schuldsanering natuurlijke personen Wsnp) The court willoblige the creditors to cooperate with this statutory debt restructuring The court will also appoint anadministrator who will help the debtor manage his assets

Elaboration

The estate incorporates all of the debtorrsquos property at the time of the judgement that admits him to thearrangement as well as all property that he obtains during the bankruptcy or application of debtrestructuring Some goods described in the Bankruptcy Act remain outside of the estate

The fixation principle applies to both bankruptcy and to debt restructuring The occurrence ofbankruptcy or debt restructuring means that the legal position of everything involved in the estatebecomes fixed

Due to the judgement in which the debtor is admitted to the bankruptcy or debt restructuring arrangementhe lawfully loses authority to have his goods at his disposal from that time onward these goods belongto the estate that is managed by the administrator or receiver He also loses the authority to conduct andto allow actual transactions in respect of these goods

He is obliged to surrender all goods that belong to the estate on the request of the administrator orreceiver The debtor must obtain permission from his administrator or receiver for some legaltransactions such as entry into a credit transaction

If a clean sheet (ldquoremission of debtsrdquo) is provided to the debtor on completion of debt restructuring itapplies to all creditors even to individuals who have not submitted their claim to the receiver There isan important restriction here the debt restructuring arrangement only works in respect of claims thatexist at the time of the pronouncement in which the debtor is admitted to the arrangement Claims arisingafter the date of the admission judgement are new debts do not therefore fall under the debt restructuringand the discharge also cannot involve them

In bankruptcy the supervisory judge may specify at the request of each interested party that a third party

254

recovery competence may not be exercised for a maximum of one month to be extended by a maximumof one month the so-called cooling-off period The administrator can form a picture of the estate Thiscooling off order can therefore also involve the mortgage holder or pledge holder or the individual withan ownership proviso

There may be provisional admission to the debt restructuring arrangement in anticipation of a finaljudicial judgement This legal facility is seldom used by the Court and only in acute emergencysituations such as a threatened house eviction

As soon as debt restructuring is provisionally or finally declared applicable an overall moratoriumapplies against creditors as far as legal exercise is concerned Attachments already made will lapse andexecutions already started will be suspended Legal or contractual interest likewise stops from that timeonwards In debt restructuring the supervisory judge may also specify a cooling off period by order atthe request of each interested party

Registration of all current insolvency proceedings takes place in the Central Insolvency Register (CIR)at the Court for Jurisprudence in The Hague this may be consulted via wwwrechtspraaknlregisters


Voluntary arrangements with the creditors have no basis in the law Therefore all creditors need to be infavour for such an arrangement to succeed There is case law whereby one (or two) creditors are forcedto participate in an arrangement

Sale of the enterprise before bankruptcy


The sole objective of bankruptcy proceedings is liquidation of the available equity to distribute amongthe creditors It is therefore to be considered creditor-friendly

The moratorium proceedings have a restructuring objective rather than liquidation in order to preventthe latter Moratorium if successful is primarily aimed at the debtorrsquos interest

The debt restructuring proceedings in Court have a double objective liquidation of the available equityand restructuring of the debt burden


In the case of bankruptcy the debtor (entrepreneur or private individual) must be in the situation wherehe has ceased to make payments

In the case of moratorium the debtor must foresee that he will not be able to continue paying his duedebts The moratorium proceedings are reserved for entrepreneurs

In the case of the Debt Restructuring for Natural Persons Act

(i) either it can reasonably be foreseen that the person will not be able to continue paying his debts

(ii) or the person is in the situation of having ceased to make payments

The court must be satisfied that the company is or is likely to become unable to pay its debts as theyfall due

255

What is the process for filing Who can place the company into insolvency proceedings

Bankruptcy is open to both natural persons and corporate bodies The debtor must be in the situationwhere he has ceased making payments This means that there is at least a due debt and a claim forsupport The Bankruptcy Act does not require any (judicial or extrajudicial) preparatory proceedingsThe Court does however require a well-founded petition

If the debtor is temporarily no longer able to pay your debts it can ask the court to grant a moratoriumThe debtor will have to ask a attorney at law to submit the application Arranging moratorium can helpthe debtor avoid bankruptcy Only the debtor has the possibility to apply for the moratorium in otherword creditors do not have that possibility Moratorium is not granted to a natural person who does notpractice an independent profession or business nor is this the case for an insurer

Debt restructuring is only open to natural persons Several criteria apply to the debt restructuringarrangement

Prior to application of the legal debt restructuring arrangement the law imposes mandatory pursuit of anextrajudicial phase On the grounds of a model statement issued by the municipality it must be evidentthat there have been attempts to reach an amicable settlement Why these attempts have been in vain mustalso be evident The debt assistance provision at a local level supports this so-called amicable phase

The following applies when applying debt restructuring

(i) An incurable debt burden must be involved in other words there is no prospect of repayment

(ii) The debtor must enclose a model statement with the restructuring application completed by themunicipality and signed by him in person and must also submit a complete petition to the Court asdescribed in Section 285 BA

(iii) The debts must have arisen or remained unpaid in good faith The Court will interpret this opencriterion in each case Debts from criminal acts are not regarded as arising in good faith In accordancewith jurisprudence from the Supreme Court and the Directives of judicial policy it is important here thatno attempts have been made to disadvantage creditors It is also important that the debts have not arisenor remained unpaid very recently and that where in any way possible there has been partial repaymentalong with its frequency In other words there is no consequent pattern of incurring debts withoutdemonstrable improvement


The Court takes the most consequential decisions in the bankruptcy and in the debt restructuringarrangement such as admission or refusal of the proceedings and granting discharge in debtrestructuring or a levy from the bankruptcy or a possible interim termination of debt restructuring TheCourt may also dismiss the receiver or administrator if he neglects his legal duties

An acting supervisory judge is appointed from the Court for the numerous decisions of management andsupervision of the estate during the term of the proceedings This individual supervises the receiver oradministrator grants permission for some transactions and decides on possible complaints frominterested parties

As soon as the Court has opened insolvency proceedings it appoints both a supervisory judge and areceiver (in bankruptcy) or administrator (in moratorium or debt restructuring) The tasks of the receiverand administrator are described as follows in the Act supervision of compliance by the debtor with theobligations arising from the law and managing and liquidating the estate These tasks apply regardless

256

of whether the debtor is a private person or a company

In the moratorium arrangement the administrator must conduct the management of the estate together withthe debtor

A bankruptcy is sometimes declared on the debtorrsquos own initiative but this is generally done on theinitiative of a creditor If this is rejected the creditor has the right of higher appeal if it is admitted thatthe debtor has a right of higher appeal On behalf of the creditors the receiver can nullify certain legaltransactions conducted by the debtor up to one year before the bankruptcy that have resulted in creditordisadvantage for example a sale of valuable property well below market value The verificationmeeting chaired by the supervisory judge offers creditors the chance to have their say Creditors maysubmit a complaint about the receiver to the supervisory judge

Duty of effort in debt restructuring the debtor who is admitted to the debt should exert maximum effortfor his creditors for a period of three years so that as much money as possible comes into the estate Forthree years he will have to make his capacity to repay available to his creditors up to 95 of theapplicable support level

Both in bankruptcy and debt restructuring there is a duty to inform the administrator or receiver fully andaccurately about everything that he knows of or can understand that is important for proper completionof the proceedings Failing to comply is punishable


The law does not specify the term of a bankruptcy Most bankruptcies are completed within eighteen tothirty-six months generally with a lack of revenue and based on the simplified proceedings withoutverification Complicated major bankruptcies often take longer The supervisory judge monitors theprogress made by the receiver

As a rule debt restructuring takes three years In exceptional cases this period can be longer but neverlonger than five years In exceptional cases the debt restructuring period can also be shorter up to aminimum of one year if the Court saw no reason to hold a verification meeting These latter proceedingsare also referred to as simplified debt restructuring and are reserved for those cases in which it isestablished that near enough nothing will be regained from their claim


The directors of the company have the right to propose an arrangement to the creditors in court Alsothey have the right to request the court to dismiss the receiver


No


A proposal for a new Bankruptcy Act was thrown off the table in 2011 There are advanced plans tointroduce a pre-pack which is already being used in some courts There are early plans to introducestronger obligations to cooperate with the receiver by both the bankrupt(s directors) and third parties

3 Creditor issues

257


All liens are lifted as a consequence of a bankruptcy Individual creditorrsquos rights vis-agrave-vis the debtorare lost in favour of the receiver


The same way it would if the company were not in bankruptcy Secured creditors have the right toenforce their security for the full amount of the debt If the value of the debt exceeds that of the securitythe creditor will rank as unsecured for the balance


Set-offs apply as long as they are not fraudulent In most cases contractual limitations to set-off remainin force some statutory limitations are lifted


Paying inter-company debts before other debts may under circumstances be fraudulent


If the figures of subsidiary companies are included in the financial statements of the parent company andthe parent issues a ldquojoint and several liability statementrdquo assuming responsibility for all debts of thesubsidiary companies then the intermediate company can refrain from consolidation Furthermore anaudit is not required A declaration in writing with the shareholdersrsquo resolution on the joint and severalliability and the consolidated parent financial statements prepared in accordance with the 7th EuDirective is required to be filed with the Chamber of Commerce


A creditor committee is common only in big bankruptcies It needs to be consulted for several decisionstaken by the receiver giving it the opportunity to appeal to the supervisory judge from receiverrsquosdecisions



In bankruptcy the receiver controls the assets of the company With permission from the supervisoryjudge the receiver may continue the business for a limited period of time under his supervision Thereceiver will only do so when he can be sure that the profits will outweigh the costs

In a moratorium the company is run by the receiver and the directors jointly


Bankruptcy expenses will rank above all other claims but those of excluding secured creditors Theadministrator may borrow with the permission of the supervisory judge and vest security over assets


The declaration of bankruptcy may entitle a contract counterparty to terminate its contract with the

258

debtor depending on the terms of the contract The moratorium does not prevent a counter-party fromexercising its right to terminate a contract with the company if the contract contains such a right (thoughit prevents legal process being commenced)



No obligation exists for the creditors to submit all claims to the receiver or administrator Anyonewishing to share in the income which is paid out via what is referred to as a distribution list to knowncreditors does need to submit his claim

Claims are filed in writing with the receiver They state the nature of the claim In case of a preferredclaim the legal basis of the preference is mentioned Documents supporting the claim are provided


Claims need to be filed within a time frame set by the supervisory judge only when both the receiver andthe supervisory judge are of the opinion that there is a chance that the creditors may expect a paymentThis time frame is communicated by the receiver to the creditors of whose existence he is aware


In bankruptcy the following rules of priority apply

(i) the receiverrsquos costs of realising fixed assets

(ii) obligations incurred by the receiver

(iii) general expenses and costs of the bankruptcy

(iv) preferential creditors

(v) unsecured creditors including the value of the debt exceeding the security of secured creditors

(vi) shareholders


None other than those prescribed under the EC Regulation



Bankruptcy does not result in a cram down of the companyrsquos debt However the receiver may assist infacilitating an arrangement

Cram down is available for such arrangement Proposals usually need to be approved by more than half

259

in value of the creditors and more than half in number of the creditors as well as the court


Bankruptcies may end by

(i) termination by the court and dissolution of the company

(ii) distribution to the preferred creditors and dissolution of the company

(iii) distribution to the ordinary creditors and dissolution of the company

(iv) full payment to all creditors

(v) approval and performance of a scheme of arrangement

Most bankruptcies end in termination by the court without distribution to any of the creditors

7 International InteractionWhat international framework of rules apply to the company



(i) the EC Regulation insolvency proceedings opened in a member state must be recognised in all othermember states

(ii) Insolvency Act of 1893

(iii) case law

(iv) court rules by the Counsel of Supervisory Judges in Insolvency (RECOFA)

(v) soft law best practice rules laid down by the professional organisation of insolvency practitioners

260

New Zealand

Jeremy Carr Partner Burton amp Co

wwwburtoncoconz email jacburtoncoconz tel 00 64 9 300 3777



If the assets in question are those other than land then generally by complying with the requirements ofthe Personal Property Securities Act 1999 (ldquoPPSArdquo) and the Personal Properties Securities RegisterCompany assets involving land require that a mortgage be taken over the land Other common lawsecurity arrangements also exist such as liens however these are generally of lesser effect againstregistered securities


Yes the voidable transactions process under the Companies Act 1993 enables liquidators to recoverpayments and other benefits conferred on particular creditors at a time when the company was unable topay its due debts Generally speaking this can be anyway up to 24 months prior to the appointment of aliquidator and transactions made within 6 months of the appointment of a liquidator are at a greater risk


Personal fines can be imposed andor restoration orders granted depending on the nature andsignificance of the breach concerned

2 Taking action


The two key procedures are receivership or liquidation There is also the relatively new and less usedprocedure of voluntary administration This memo is primarily concerned with receivership andliquidation procedures given the relatively uncommon use of voluntary administration in New ZealandLiquidation has been New Zealands main form of insolvency and is highly regulated


Procedures such as shareholder bail outs or informal creditor compromises


In a receivership situation the assets are generally realised for the benefit of the secured creditor whomade the appointment In a liquidation procedure the assets are realised primarily for the benefit ofunsecured creditors All involuntary insolvency situations are generally creditor friendly as opposed toa voluntary wind up which can be debtor friendly

261


The trigger for receivership is generally default under an agreement with a creditor for non-paymentLiquidation is generally brought about by a companyrsquos failure to pay its debts as they fall due andinability to continue to trade In short a company must at all times satisfy the solvency test under theCompanies Act 1993 meaning that

(i) A company must be able to pay its debts as they become due in the normal course of business and

(ii) The value of its assets must be greater than the value of its liabilities (including contingentliabilities)


Public notice must be given with a copy of the public notice to the Companies Office Registrar withinseven days after the appointment of a liquidator or receiver


Shareholders and directors may place a company into voluntary liquidation or receivership Creditorsmay take the step of applying to the High Court to place a company into an involuntary liquidationSecured creditors also generally have the right under security agreements with a company to appoint areceiver on breach of a security agreement obligation


The Court can make a determination based on submissions made by a creditor or creditors and thecompany about non-payment of debts If the company is not in a position to pay the debt or enter into anarrangement to pay the Court may place the company into liquidation The Court can either appoint aprivate liquidator (such as a suitably qualified chartered accountant) selected by the creditor or theOfficial Assignee


There is no set time frame as each is determined by the complexities and relevant facts surround theinsolvent company


A Receiver must prepare an initial report on the state of affairs with respect to the property inreceivership (generally done within 2 months of appointment) In addition to the first report a receivermust prepare further reports at the end of each six-month period and at the end of the receivership Thesereports must summarise the state of affairs with respect to the property in receivership as at those datesand the conduct of the receivership including all amounts received and paid during the period to whichthe report relates

In a liquidation process directors are required to complete a Statement of Affairs form which includes abrief description of the companyrsquos history trading details details of the cause of the companyrsquos failureall company assets all company liabilities all shareholder information and any legal claims pending byor against the company

A liquidator will then send a report to all creditors outlining the companyrsquos financial position at the dateof liquidation The report is usually sent 25 working days after the date of liquidation The report willexplain how the liquidator intends to manage the liquidation and how long it will take to complete The

262

Official Assignee sends creditors an update on the liquidation every six months until the process hasbeen completed A final report is then sent to all creditors


No


New Zealand has the PPSA which codifies the law on all personal property securities (personalproperty generally being all assets other than land) The PPSA legislation was modelled on theCanadian system and has now been followed by Australia The PPSA has its own very particularrequirements that can be very different from common law As an example title to goods in a receivershipsituation can be and often is largely irrelevant


Very unlikely

3 Creditor issues


While they can file a claim for monies owing by the insolvent company they will generally lose out tosecured creditors


The first secured creditor will generally look to appoint a receiver Lesser ranking secured creditorswill look to work with the first secured creditor if possible Creditors with specific security chargesover certain company assets such as a ldquoPMSIrdquo under the PPSA will look to take possession of the assetsin question


Mutual credits mutual debts or other mutual dealings between a company and a person must be set offand only the balance may be claimed in the liquidation or is payable to the company Insolvency set-offis not available to a creditor in relation to a transaction or assignment made during a specified periodprior to the insolvency unless the creditor establishes it did not have reason to suspect that the companywas unable to pay its debts as become due This prohibition does not apply to voluntary administration


The voidable transactions process can apply


Yes in situations where transactions between companies fall foul of the voidable transactions process


In the case of administration a creditor committee can be established but its powers are limited as it hasno power of direction over the administrator concerned but is entitled to be consulted by the

263

administrator as to matters relating to the administration The committee also receives reportsconcerning the progress of the administration



A receiver (or joint receivers) in a receivership situation and liquidator in a liquation Directors remainbut lose their ability to act They must cooperate with the liquidator so the affairs of the company arefairly and equitably resolved however they donrsquot have any day to day responsibilities for the operationsof the company following the appointment of the liquidator


Generally through existing company revenue sources New lines of funding from third party lenders areoften not available unless a company in receivership stands a chance of trading out of trouble or beingsold


No DIP is not a known funding product in New Zealand


Employees with any claims for unpaid salary or wages and holiday pay are treated under law aspreferential claims meaning that they will rank ahead of unsecured creditors if there are funds availablefor payment This does not apply to employee payments to directors or their families


Unless the liquidator agrees or the court orders otherwise legal proceedings cannot be commenced orcontinued against the company and no enforcement rights or remedies over or against company orproperty can be exercised A liquidator also has powers to disclaim what it considers onerous contractsincluding leases



The liquidator will ask creditors to provide details of all debts owed by the company A claim formmust be completed and filed with a liquidator and creditors may need to provide a copy ofdocumentation showing a debt existed at date of liquidation (for example copies of loan agreementsbank statements court orders invoices receipts and acknowledgments of debt) Generally the claimmust also state with it is preferential ordinary or deferred claim


Generally as specified by the liquidator (unless a Court has ordered otherwise)


264

In the case of liquidation the following are generally paid out in this order

1 Secured Creditors secured creditors who have a claim against a specific asset of the company orclaim over all of the assets of the company

2 Liquidatorrsquos expenses the liquidator has a priority claim on all assets recovered in the liquidationThis includes any expenses incurred by the liquidator in the ongoing running of the business (staff wagesfrom the date of liquidation rent etc)

3 Creditor court costs the costs of a creditor who petitioned the court to liquidate the company

4 Staff wages staff wages of company employees earned in the last four months and all holiday pay (upto a maximum of $16420 per employee)

5 Inland Revenue Department The IRD is paid any PAYE and GST owing by the company

6 Unsecured Creditors Once all of the above expenses are paid out the unsecured creditors are paidnoting that it is unusual for unsecured creditors to be paid in a typical liquidation

7 Shareholders After all other costs have been paid out in full the shareholders receive the balance ofany funds This almost never happens




No however lsquoinformalrsquo cram down procedures often come into play for lenders that have a second orlower ranking security upon the discovery that the security may be worthless and the prior rankingsecurity holder and debtor are either planning to restructure or to sell leaving lower ranking securedcreditors with nothing The ability of senior creditors to cram down junior parties is often animportant component of a successful restructuring in an insolvency situation


When the liquidation procedure is complete the company is struck off the Companies Office registerWhen the receivership ends the receiver must send or deliver to the Registrar notice in writing of thefact that the receivership has ceased


Secured creditors always stand a better chance of recovery of monies as opposed to unsecured creditorsnoting that in many instances you must be the first secured creditor with a general charge over all thecompany assets (as is standard banking policy in New Zealand) to successfully recover monies owingand that even secured creditors often lose out to a first secured creditor in such case


265


Generally case specific and will depend on the commercial parameters involved although the ability andappetite of shareholders to bail a company out andor the likelihood of repackaging the company or itsassets for sale are two key drivers


A sale of the company or its assets often will accelerate insolvency situation



The Insolvency (Cross-border) Act 2006 is the first comprehensive attempt to regulate different types ofcross-border insolvency issues in New Zealand The centre piece of the 2006 legislation is its firstschedule (Rules applying to cross-border insolvency proceedings) which closely follows theUNCITRAL Model Law on Cross-Border Insolvency 1997


There is no statutory bar on the appointment of an overseas liquidator in New Zealand but the courtshave indicated that this person should preferably be a New Zealand resident

Foreign creditors are dealt with in the same manner as domestic creditors in respect of liquidations andreorganisations

Foreign judgments or orders are recognised where they conform with the Reciprocal Enforcement ofJudgments Act 1934

266

Romania

Dana Isaroiu Partner Fine-Law

wwwfine-lawro emaildbfine-lawro tel +40 21 230 0142

The responses herein below were provided based on the following Romanian normative acts in force in2014

The Romanian Civil Code promulgated by Law 71 as of 2011 as subsequently amended andsupplementedThe Law no 852014 on the insolvency procedureThe Romanian Civil Procedure Code promulgated by Law 76 as of 2012 as subsequently amended andsupplemented andCouncil regulation (EC) No 13462000 of 29 May 2000 on insolvency proceedings

1 Issues arising when a company is in financial difficulties1


According to the Romanian law a creditor may secure his receivable against a debtor by placing amortgage a pledge or other legal security interests or retention rightsliens on the debtorrsquosgoodsassets By doing so he becomes a secured (privileged) creditor

In Romania the mortgage is defined as a real guarantee over mobile or fix goodsassets whethertangible or non-tangible Unlike the mortgage the pledge involves the actual conveying of the goodassetto the creditor therefore the pledge may only be placed over tangible assets Similarly a person whohas the obligation to return or to remit a goodasset to a creditor is entitled to retain such goodasset aslong as the creditor does not perform at his turn his own obligations sourcing from the same legalrelationship groundssource or does not reimburse the necessary and useful expenses made in relationwith that goodasset or the damages caused by that goodasset

As a rule of thumb from the date of the commencement of an insolvency procedure all contentious non-contentious or enforcement procedures against the insolvent company are suspended and the creditorscan no longer take security over the assets The suspended contentious non-contentious or enforcementprocedures are terminated on the date the court decision ordering the commencement of the insolvencyprocedure becomes final

Nonetheless in a number of cases a secured creditor may request the syndic judge to revoke thesuspension with regard to its security and the immediate capitalization of such security asset within theinsolvency procedure


Yes

The receiver (judicial administrator) or where applicable the liquidator may petition the syndic judgeto cancel fraudulent deeds and operations concluded by the debtor to the detriment of creditors rights

267

within the last 2 years preceding the commencement of the insolvency proceedings2

The following deeds and operations may be cancelled resulting in the return of the transmittedgoodsassets and of the value of other performed actions

a) free of charge transfers occurred within the last 2 years before the commencement of the insolvencyprocedure (sponsorships for humanitarian purposes are exempt)

b) operations where the debtorrsquos obligation obviously exceeds the benefit received made within the last6 months before the commencement of insolvency proceedings

c) acts concluded within the last 2 years before the commencement of the insolvency procedure with theintention of all parties involved in them to conceal assets from pursuing creditors or harming thecreditors in any other way

d) acts of transfer of property to a creditor to extinguish a prior debt or in the benefit thereof made inthe 6 months days prior to the insolvency procedurersquos initiation if the amount that the creditor mayobtain during the insolvency proceedings is less than the one specified in the transfer deed

e) establishment of a preference right for a previously unsecured debt during the 6 months precedingthe commencement of the insolvency procedure

f) prepayments made in the 6 months prior to the commencement of the insolvency proceedings if duedate was set for a date later than the commencement of such proceedings

g) deeds of transfer or obligation undertakings by the debtor in a period of two years preceding the dateof the commencement of the insolvency procedure with the intent to hide delay insolvency status or tofraud a creditor

Additionally the law stipulates a series of transactions concluded within 2 years preceding thecommencement of the insolvency procedures with a number of debtor affiliates (associates membersadministrators shareholders controlling persons etc) that are also cancellable and therefore therelevant obtained benefits returnable if such transactions were entered into with the intention to harmthe creditors


Liability of the debtorrsquos management may be engaged in case the debtorrsquos directors or auditors or otherpersons fraudulently determined the debtorrsquos insolvency

Thus upon the request of the judicial administrator or the liquidator the syndic judge may decide that thesupervising or the managing bodies of the company as well as other persons that contributed to theinsolvency status of the debtor may be held liable for a part or for all of a debtorrsquos liabilities At thesame time the judicial administrator or the liquidator may ask the syndic judge to undertakeconservatory measures in relation to the property of the persons sued as culpable

Liability of the debtorrsquos managing persons cannot be triggered in cases where such persons haveopposed within the relevant management bodies to the decisions leading to insolvency or in caseswhere such persons have been missing when such decisions were taken and have recorded theiropposition after such decisions had been taken

1 Note that if a company cannot meet its financial obligations it can enter either reorganization

268

(sometimes followed by bankruptcy in case of reorganization failure) or directly bankruptcy Theapplicable legal regime in the two cases is similar only to a certain extent

2 For the purposes of this presentation ldquoinsolvency proceedingsrdquo means both the judicialreorganization procedure and the bankruptcy procedure as such are defined in Section 2 of this material(ldquoTaking actionrdquo) in the answer to Question 2 point (i) Nevertheless whilst the judicialreorganization procedure is a procedure by which the debtor is allowed to continue its business basedon a reorganization plan with an aim to rescue the company as a going concern the bankruptcyprocedure is aimed at satisfying the creditors which involves the capitalization of the companyrsquos assetsto the benefit of the creditors and for the purpose of satisfying their receivables followed by theliquidation of the company

2 Taking action


The Romanian law provides for two different insolvency proceedings the general procedure and thesimplified procedure

(i) The general procedure

The general procedure generally applies to persons falling under the definition of bdquoprofessionalsrdquo asstipulated in the Romanian Civil Code namely persons that exploit an enterprise (with lucrative or non-lucrative scope) As an exception certain professionals are subject to the simplified procedure in casesenumerated by law (and mentioned at point (ii) immediately below)

Under the general procedure the debtor enters after a period in which it is placed under surveillanceeither successively into judicial reorganisation followed by bankruptcy or as the case may beseparately into judicial reorganisation or bankruptcy only The period of surveillance is defined bylaw as the period between the date of the commencement of the insolvency procedure and the date ofconfirmation of the reorganization plan or where applicable the date of commencement of thebankruptcy procedure

Judicial reorganisation is defined by law as an insolvency procedure that applies to the insolventdebtor legal person in view of paying its debts according to a reorganisation plan The procedureinvolves the making approval confirmation implementation of such reorganization plan and thecompliance with that plan which may provide together or separately the following

a) Operational andor financial restructuring of the debtor

b) Corporative restructuring by modification of share capital structure

c) Restraining the activity by way of partial liquidation of the assets owned by the debtor

Bankruptcy is according to law an insolvency procedure that is collective and egalitarian and isapplied to the debtor with the scope of liquidating its assets to cover its debts and is followed by thedeletion of the debtor from the registry in which it is registered When the bankruptcy procedure endsthe debtor ceases to exist

(ii) The simplified procedure

269

It applies to the following insolvent debtors that can be framed in one of the following categories

a) Professional individuals subject to registration in the Trade Registry with the exception of thoseexercising liberal professions (eg lawyers architects)

b) Family enterprises and members of family enterprises

c) Debtors that are professionals and meet one of the following conditions they do not own any assetstheir statutes or accounting documents cannot be found their administrator cannot be found theregistered company or professional headquarter does not exist anymore or does not correspond to theaddress registered in the Trade Registry

d) Legal persons that are dissolved voluntarily judicially or as an effect of law before the insolvencyrequest is filed even in cases the liquidator has not been appointed or although appointed registrationof such appointment has not been made with the Trade Registry

e) Debtors that have declared by their own insolvency request their intention to go to bankruptcy

f) Any person that undertakes activities that are specific to professionals which have not obtained theauthorization required by law for exploitation of an enterprise and is not registered in any dedicatedpublic registries

The simplified procedure places the debtor directly into bankruptcy procedure


The judicial reorganization procedure and the bankruptcy procedure are the only actual insolvencyprocedures to be used for covering the debtorrsquos liabilities

In situations where the debtor has not yet become insolvent but is facing financial difficulties the lawestablishes two options that the debtor and respectively the creditors may have as the case may be inview of saving the debtor from an eventual insolvency These procedures are

(a) The ad-hoc mandate ndash a confidential procedure triggered by de debtorrsquos request when facingfinancial difficulties by which an ad-hoc mandatary of the debtor appointed by the competent courtnegotiates with creditors so as to reach an understanding between one or more of creditors and thedebtor with respect to the debtorrsquos liabilities

(b) The preventive concordate ndash a contract concluded between the debtor facing financial difficultieson one side and the creditors holding 75 of the value of the accepted and unchallenged debts on theother as endorsed by the syndic judge by which the debtor proposes a plan for recovery and payment ofdebts of such creditors and the creditors accept to support the debtorrsquos efforts to escape financialdifficulties

While the above four procedures may be qualified as formal since they are stipulated by law a debtor isnevertheless entitled to conclude arrangements with its creditors to sort out its debts before theinsolvency procedures are commenced but such arrangements do not prevent such creditors or otherthird parties from filing for insolvency or enforcing binding Court rulings against the debtor


270

The ad-hoc mandate and the preventive concordate may be considered as debtor-friendly since such areprocedures that may be followed before insolvency and their target is to avoid insolvency and to helpthe debtor escape financial distress

For the scenario in which insolvency has occurred the reorganization procedure might be considered adebtor-friendly procedure as it aims at keeping the company as a going concern and strengthening itsbusiness by pursuing a reorganization plan which may of course cause delays in payments towardscreditors whilst the bankruptcy procedure is a rather creditor-friendly procedure its purpose being thesatisfaction of the debtorrsquos creditors at the cost of sacrificing the company


Insolvency is defined by law as the status of the debtorrsquos patrimony (our note bdquopatrimonyrdquo meaning herethe the debtorrsquos assets and liabilities as a whole) characterized by insufficiency of funds available forpaying debts that are certain liquid and due as follows

a) insolvency is presumed when the debtor after 60 days from due date has not paid a debt to acreditor This presumption is not absolute - it can be overthrown

b) insolvency is imminent when it has been proven that the debtor will not be able to pay on maturitydate the engaged due debts with the funds that available on that date

Therefore the triggers for the commencement of the insolvency proceedings are the lack of liquidities asper letter a) above and respectively the imminent insolvency as per letter b) above


Insolvency proceedings require a written insolvency request to the competent courts Such request maybe filed by the creditors or by the debtor itself or by another person or entity entitled by the law TheAgency of Financial Supervision may also initiate the procedure but only against the financial entitiesunder its authority The insolvency request is admissible in case of an unpaid debt that is certain (ietheir existence is doubtless) liquid (ie have a definite or at least determinable amount) and due andexceeds RON 40000 (approx EUR 9000) A companyrsquos employee is also a creditor for insolvencypurposes if (s)he has a receivable against the company in amount of minimum 6 national gross averagewages

The debtor which has reached insolvency status is obliged to file for insolvency procedure in 30 daysfrom the occurrence of such status If on expiry of such term the debtor is engaged in good faith non-judicial negotiations for debt restructuring the debtor must file the insolvency request within 5 daysfrom the failure of such negotiations The same 5 days term is applied in case of good-faith debtors thathave reached insolvency status while pursuing the ad-hoc mandate or the preventive concordateprocedures provided that there are strong indications that such procedures may lead to an extra-judicialagreement with creditors

The debtor facing bdquoimminent insolvencyrdquo (as defined by law and noted above) may but is not obliged tofile an insolvency request


The competent courts of law (County Tribunals) on the request of the entities mentioned in the answernoted immediately above


271

All proceedings regarding judicial reorganization and bankruptcy except for the appeals filed againstthe syndic judgersquos decisions (which are subject to the higher jurisdiction of the Courts of Appeal) areunder the exclusive competence of the Tribunal having jurisdiction over the administrative unit (County)in which the debtor has lastly been headquartered (and registered as such) for 6 months or more Thesyndic judge is randomly selected through a computerized system amongst the specialized judges withinthe respective Tribunal

As a rule of thumb the syndic judge controls the judicial procedure while commercial decisions meantto redress the debtor andor satisfy the claims of the creditors belong to the receiver or to the liquidatoras the case may be

Amongst the numerous procedural attributions of the syndic judge are as follows (a) to decide uponcommencement of the insolvency procedure both general as well as simplified procedure (b) toappoint or as the case may be replace the temporary receiver or liquidator and set forth theirattributions (c) to confirm the receiver or the liquidator appointed by the creditorsrsquo assembly (d) tosettle the potential objections filed by the creditorsrsquo committee the debtor or any other persons againstthe measures taken by the receiver or the liquidator (e) to examine the actions filed by the receiver orby the liquidator for the cancellation of the fraudulent actions committed before the opening of theinsolvency procedure and for the nullity of payments and operations undertaken by the debtor withoutright after the commencement of the insolvency procedure (g) to decide upon the closing of theinsolvency procedure


In practice insolvency proceedings are lengthy and have a tendency to stretch over several years Notime frameworks are established or imposed by law except the one regarding the reorganization planwhich forms the back-bone of the judicial reorganization procedure Thus such reorganization plan isvalid for 3 years from the date of its confirmation


Further to the commencement of the insolvency procedure the receiver or the liquidator shall send anotice to the debtor creditors and to the Trade Registry office or to any other registry where the debtormight be registered This notice will also be published in a large circulation newspaper as well as inthe Insolvency Procedure Bulletin

After the court decision establishing the commencement of the insolvency procedure becomes final alldocuments and correspondence of the debtor receiver or liquidator shall contain the annotation ldquoininsolvencyrdquo in Romanian English and French After the debtor enters judicial reorganization orbankruptcy the annotation shall stipulate such status as applicable

Following the notification from the receiver or the liquidator the creditors may submit their claims Suchclaims shall be recorded with a register maintained with the competent court of law After all claims areverified the receiver or the liquidator shall establish a preliminary table of debts Such table may bechallenged by creditors debtor and other interested third parties


The debtorrsquos general meeting or assembly has the right to appoint a representative as a specialadministrator (other than the court appointed receiver) in order to represent the associates shareholders members of the debtor and to participate in the insolvency procedure on behalf of thedebtor in case the debtor is allowed by the syndic judge to remain in control of its own managementduring insolvency

272

On the date of commencement of the insolvency procedure all contentious or non-contentious actions ormeasures for the enforcement of claims against the debtor or its assets shall be suspended by law

Any interest penalty for late payments or any other penalty deriving from debts to be claimed before thecommencement of the insolvency procedure cease to accrue (with some exceptions provided by law)and the debtorrsquos shares are suspended from transactions on the stock exchange market until theconfirmation of the reorganization plan The titles issued by the debtor are removed from the regulatedfinancial market when the debtorrsquos bankruptcy occurs

Additionally no utility supplier whether electricity natural gas water phone services or other similarhas the right to change refuse or temporarily cease the supply to the debtor or its assets of such utilityduring the observation period and judicial reorganization period if the debtor is a captive consumeraccording to law


Whilst aiming at satisfying the creditorsrsquo interests as much as possible the law offers the debtor alimited possibility of self-management which is subject to an approved reorganization plan As a ruleupon the commencement of the insolvency proceedings the debtorrsquos right to manage its own activityceases The management of the debtor is entrusted with the receiver unless the debtor has expressed itsintention to be subject to judicial reorganisation in such case the debtor retains the right to manage itself(through the special administrator appointed by the statutory assembly ofmembersassociatesshareholders of the debtor) until the commencement of the bankruptcy procedure

That said we may reasonably assert that the insolvent company is a bdquodebtor in possessionrdquo during thejudicial reorganization procedure (subject to the conditions noted above) Nonetheless even in suchcase the debtor is procedurally supervised by the syndic-judge and operationally under the surveillanceof the receiver Furthermore the syndic judge may revoke the right of management of the debtor if anycreditor or the receiver provides that there is an indication that losses have continued to accrue or thereis no likeliness of a reorganization plan being worked out However loss of management right does notimply the loss of property right over the debtorrsquos assets

3 Creditor issues


According to law in case of sale of encumbered assets (mortgage pledge any other security interests orliens of any kind) the amount obtained shall firstly cover the sale related expenses including fees andexpenses related to the preservation and administration of such assets Secondly the interests of thesecured creditor in relation to an asset shall be satisfied before those of the unsecured creditor Thus ifthe secured creditorrsquos claim exceeds or equals the sale amount the unsecured creditors are forced towait until other liquidities are made available if the case may be or risk the impossibility to recovertheir claim Unfortunately in most cases of bankruptcy the unsecured creditors do not satisfy their debts


The procedure for the liquidation of the debtorrsquos assets is carried out under the control of the syndicjudge who supervises the activity of the liquidator and takes the necessary steps for the sale of thedebtorrsquos assets and the distribution to the creditors of the amounts resulting from the liquidation As arule of thumb a secured creditor cannot enforce its security individually and by a separate action once

273

the insolvency procedure has commenced Nonetheless in a number of cases a secured creditor mayrequest the syndic judge to revoke the suspension with regard to its security and the immediatecapitalization of such security asset Whether sold prior to the commencement of or during thebankruptcy proceedings the assets that make the object of the security must be sold by auction or bydirect sale and the amount thus obtained shall be distributed with the observance of the order imposedby the law as mentioned at the point immediately above


According to Romanian law the commencement of insolvency proceedings shall not affect the right ofcreditors to claim compensation against the debtor if the conditions provided by law on compensationare met at the time of the commencement of legal proceedings


Principally intercompany debts are treated in the same way as debts vis-agrave-vis third parties Howeverclaims for repayment of shareholders or associate loans are ranked last on the claim rank list


No


The syndic judge may appoint taking into account the number of creditors a committee formed by 3 or 5creditors from amongst those having the right to vote holding biggest debts that benefit from apreference right and respectively budget debts and unsecured debts If due to the small number ofcreditors the syndic judge does not consider necessary the appointment of a creditorrsquos committee theattributions of such committee shall be exercised by the creditorsrsquo meeting or assembly

At the first session of the meeting of the creditors they can elect a creditorsrsquo committee made of 3 ndash 5creditors selected from amongst the first 20 creditors (based on the amount of their receivables againstthe debtor) The committee thus appointed will replace the committee previously appointed by thesyndic judge if the case

The main duty of the creditorsrsquo committee is to represent and defend the rights of the creditors in relationwith the debtor the judicial administrator or the liquidator and the syndic judge Consequently the mainattributions of the creditorsrsquo committee are as follows (i) to analyse debtorrsquos financial status and tomake recommendations to the creditorsrsquo assembly with regard to the debtorrsquos activity (ii) to negotiatewith the receiver or the liquidator the terms and conditions of their appointment (iii) to analyse thereports drafted by the receiver or the liquidator and if the case to challenge such reports (iii) to draftreports on the measures taken by the receiver or by the liquidator and the effects of such measures topresent such reports to the creditorrsquos assembly and to propose other measures if the case (iv) to requestthe withdrawal of the debtorrsquos right to manage its business (v) to file actions for the cancellation offraudulent deeds or operations made by the debtor to the detriment of creditors rights when suchactions were not filed by the receiver or by the liquidator



274

A The special administrator

As previously mentioned following the commencement of the insolvency procedure it may be the casethat the relevant shareholdersassociatesmembers are allowed to continue to control the debtorrsquosactivity Thus at the first session of the general meeting of the debtorrsquos shareholders they will appoint aspecial administrator whose role will be to represent the debtorrsquos interests as well as their interestsand to participate in the procedure on behalf of the debtor The special administrator has the followingmain attributions (i) to participate on the debtorrsquos behalf in the trials having as object the assessmentor cancellation of the fraudulent deeds and operations effectuated by the debtor after the opening of theinsolvency procedure that are not authorized by the syndic judge or approved by the receiver (ii) to filecomplaints during the insolvency proceedings (iii) to submit a reorganization plan (iv) to manage thedebtorrsquos activity under the supervision of the receiver after the confirmation of the reorganization plan ifthe debtor holds its right to self-management (v) once the bankruptcy procedure is initiated toparticipate in the inventory to sign the final report and the closing balance and to participate in themeeting convened for the settlement of the objections and the approval of the final report (vi) to receivethe notification regarding the closing of the proceedings

B The receiver (or judicial administrator)

Based on the offers submitted to the insolvency case file (or ex officio from the list of the NationalUnion of Insolvency Practitioners if no offers are available) the syndic shall appoint a provisionalreceiver At the first session of the creditorsrsquo assembly the creditors holding minimum 50 of theaggregate value of receivables may decide for the election of another receiver (an individual or a legalentity) authorized practitioner in insolvency and establish remuneration save for the case when suchremuneration shall be paid out of the liquidation fund established by law for such situations in whichcase the syndic judge sets forth the amount thereof This official receiver is in charge of fulfilling theactions relating to the insolvency proceedings until the bankruptcy is ordered The main attributions ofthe receiver are (i) to examine the debtors activity and the causes and circumstances which led to thestate of insolvency and to draw up reports on such matter (ii) to propose to the syndic judge either theapplication of the simplified procedure or the continuation of the general procedure and analyse theopportunity of the debtorrsquos reorganization and if the case draw up the reorganization plan (iii) tosupervise management operations of the debtor (iv) to pursue the collection of the debtorrsquos receivables(v) to file actions for the cancellation of fraudulent deeds and operations concluded by the debtor andharming the creditors rights as well as of certain asset transfers and business operations entered into bythe debtor and of the setting up of preference rights likely to prejudice the creditorsrsquo rights (vi) to terminate certain contracts concluded by the debtor

C The liquidator

In case the syndic judge decides upon the commencement of the bankruptcy procedure a liquidator shallbe appointed based on the same procedural steps applicable to the receiver as per point B above Theliquidator may also be the former receiver The mandate of the receiver ceases at the moment when thesyndic judge establishes the liquidators powers The main attributions of the liquidator are (i) toexamine the activity of the debtor who is subject to the simplified procedure with respect to the mattersof fact and drafting a detailed report of the causes and circumstances that led to insolvency bymentioning the potentially liable persons and potential grounds for engaging the latterrsquos liability if suchreport has not previously been drawn by a receiver (ii) to manage the debtors activity (iii) to fileactions for the cancellation of fraudulent deeds and operations concluded by the debtor and harming thecreditors rights as well as of certain asset transfers and business operations entered into by the debtorand of preference rights likely to prejudice the creditorsrsquo rights (iv) to place seals to make theinventory of the assets and to take the appropriate measures for their preservation (v) to terminate

275

contracts concluded by the debtor (vi) to pursue the collection of and cash in the debtorrsquos receivablesand to initiate legal claims and hire lawyers for that purpose (vii) to sell the debtors assets accordingto the provisions of the law (viii) to conclude transactions discharge debts discharge the personalguarantors and give up the tangible securities conditional upon confirmation of the syndic judge


During the reorganization procedure the companyrsquos activity continues Thus the company is financed bythe revenues generated by its activity The company may also be financed by revenues resulted from thesale of the companyrsquos assets


The commencement of the insolvency process does not automatically conduct to the termination of theexisting employment contracts After the commencement of the insolvency procedure the receiver or theliquidator may terminate urgently the individual employment contracts of the debtorrsquos employees Theliquidator has solely the obligation to serve the regular notice period to the dismissed employees asprovided in the relevant labour contracts


As a general rule the ongoing contracts are maintained as an effect of law on the date of thecommencement of the insolvency procedure Any contractual clauses establishing termination waiver ofterm benefits and anticipated maturity for reason of the commencement of the insolvency procedure arenull and void Within 3 months from the commencement of the procedure the receiver or the liquidatormay terminate any contracts unexpired leases other long term agreements as long as such contracts havenot been performed entirely or substantially by all contracting parties The receiver must respond in 30days from receipt to the notification of the contractor issued in the first 3 months from thecommencement of the insolvency procedure notification by which the receiver or the liquidator isrequested to terminate the contract In case there is no answer the receiver shall not be entitled to askfor the performance of the contract such contract being considered terminated

A contract shall be considered terminated

(a) on the expiry of 30 days from receipt of the request of the contractor regarding termination ofcontract if the receiver or the liquidator does not respond

(b) on date of such notification for termination issued by the receiver or the liquidator



The summoning of all parties as well as the communication of the procedural acts convening noticesand notices will be made by the Insolvency Procedure Bulletin an official insolvency publication thatfacilitates summoning or convening procedures and any document subpoena

Further to the commencement of the insolvency procedure the receiver shall send a notice to the debtorcreditors and the trade registry office or any other registry where the debtor might be registered at thedebtorrsquos expense This notice will also be published in a large circulation newspaper as well as in theInsolvency Procedure Bulletin Unless the notification on the commencement of the procedure was made

276

with the non-observance of the legal provisions (eg the receiverrsquos notification was not served to thecreditors with at least 10 days before the deadline for submission of creditor claims) the receivables ofa creditor who failed to submit its claims as established by the court decision establishing thecommencement of the insolvency procedure will be disregarded A term larger than 45 days of the dateof the commencement of the procedure cannot be granted by the court The employeesrsquo receivables areexempt from such rule such debts being automatically acknowledged registered by the receiver orliquidator


See above


According to the Romanian law claims shall be paid in the event of bankruptcy in the following order

1 fees stamp duties or other expenses related to the selling procedure established by law including thecosts necessary for the conservation and management of the debtors assets and payment remunerationof the judicial administratorreceiver or liquidator

2 receivables resulting from financing facilities granted to the debtor in the period of observation (aspart of the insolvency procedure) with the scope of performing its day to day business

3 claims arising from the employment relationship

4 claims resulting from the continuation of the debtorrsquos activity after the commencement of theinsolvency procedure as well as receivables owed to good faith third party owners that return theirproperty over goods (or the money equivalent) to the debtor when such return is made according to theinsolvency law

5 budgetary claims

6 claims representing amounts owed by the debtor to others based on maintenance obligationsallowances for minors or periodic payment amounts for ensuring livelihoods

7 claims representing amounts fixed by the syndic judge for the necessities of the debtor and his familyif he is a natural person

8 claims representing bank loans and interest expenses the results from the supply of goods services orother work rent lease contracts and bonds

9 other unsecured claims

10 subordinated debts in the following order of preference

(i) receivables belonging to bad-faith third party owners of former goods of the debtor as well asloans granted to a debtor legal person by a shareholder or stockholder holding at least 10 of theshare capital respectively of the voting rights in the general meeting of shareholders or whereappropriate to a member of the economic interest group

(ii) claims arising from gratuitous agreements

277



As mentioned above the courts are compelled to refrain from ruling on commercial matters beingsolely empowered to control the activity of the receiver andor the liquidator


If during any phase of the insolvency proceedings one ascertains that there are not enough assets in orderto cover all administrative costs and no creditor offers to make advance payments for this purpose thesyndic judge after an emergency hearing resulting in such refusal will issue a judgment for the closingof the procedure ruling also the removal of the debtor from the register where it is registered

The reorganization procedure is closed by a court ruling based on the receiverrsquos report after thefulfilment of all payment obligations undertaken by way of the confirmed reorganisation plan

The bankruptcy procedure is closed when the syndic judge has approved the final report all of thedebtorrsquos funds and assets are distributed and the unclaimed funds are deposited with the bank Further toan application from the liquidator the syndic judge shall issue a ruling closing the procedure andordering the removal of the company from the relevant register


As previously mentioned the claims of the creditors enlisted in the final table of debts shall be paid inthe order provided by the law According to the Romanian law the creditors from a lower category (thenon-secured creditors) are entitled to satisfy their receivables against the insolvent company only afterfull repayment of the creditors of a hierarchically superior category In the case of creditors having thesame priority ranking the amounts distributed shall be granted proportionally with the amount allocatedfor each debt in the final table of claims As a consequence low priority ranking creditors may be facedwith the impossibility of recovering their debts



No the Romanian law permits only a judicial procedure of insolvency for entities reaching insolvencystatus


We understand by ldquoavailable accelerated processesrdquo the direct entering into bankruptcy which thustheoretically allows the termination of the proceedings within approximately 1 year We have detailedabove the cases where the insolvent company may be made subject to the simplified procedure



278

Since the Romanian accession to the European Union (ldquoEUrdquo) in 2007 the international private lawaspects regarding insolvency are mainly regulated by the Council Regulation (EC) No 13462000 of 29May 2000 on insolvency proceedings The Regulation No 13462000 establishes a common frameworkfor insolvency proceedings in the EU The purpose of harmonized arrangements regarding insolvencyproceedings is to avoid assets or judicial proceedings from being transferred from one EU country toanother in order to obtain a more favourable legal position to the detriment of creditors


According to EC regulation no 13462000 EU judgments opening insolvency proceedings areautomatically recognized in Romania Any other bankruptcy judgments issued by non-EU courts may berecognized by the Romanian courts as long as they are not incompatible with the EU and Romanianlaws

279

Russia

Sergey Vodolagin Partner Westside Advisors

wwww-aru email vodolaginw-aru tel +7 499 608 06 01



A creditor may secure its claim to the debtor in two ways

(i) PledgeMortgage By entering into pledge (mortgage) agreement the creditor establishes securitywith regard to certain asset of the debtor thus enjoying several privileges in case of the bankruptcy of thedebtor (please see 32)

(ii) Interim measures The creditor may seek to obtain interim measures (injunction) from the statearbitrazh (commercial) court1 which prevent the debtor from disposing of his assets before the trial Thecreditor may seek such injunction before actual filing of the claim In this case the creditor must providea deposit in the amount of the damages which may arise out of the injunction


The bankruptcy manager (only) may challenge the following types of transactions entered into by theinsolvent debtor

(i) ldquoSuspiciousrdquo transactions The term ldquosuspiciousrdquo implies that the value of the transaction deviatesfrom the normal value of comparable transactions Only transactions entered into within one year beforefiling the petition are under risk

(ii) Transactions detrimental (aimed at causing harm) to the interests of the creditors The bankruptcymanager may also challenge the transactions aimed at impairing monetary interests of the creditors Thetransactions of the said type entered into within three years before filing the petition are at risk

(iii) Preferential transactions All transactions aimed at establishing a priority of one creditor over theothers with regard to the debtorrsquos estate may be challenged by the bankruptcy manager The transactionsof the said type entered into within one month before filing the petition or after filing the petition may bechallenged


The state of distress normally implies that the company is not able to fulfill its obligationsConsequently the director must file a petition for bankruptcy In case of the failure to file such petitionthe director will bear contributory liability for trading while in distress

In the most serious cases a director may face criminal liability Under the Criminal Code a director maybe held criminally liable for

(i) Fraudulent actions aimed at concealment of the assets of the debtor

280

(ii) Intentional bankruptcy (when the director intentionally takes such business actions which ultimatelyresult in the bankruptcy of the debtor)

(iii) Sham bankruptcy (when the director intentionally makes public believe that a company isinsolvent)

The liability for the following crimes may vary from criminal fine to imprisonment

2 Taking action


Bankruptcy proceedings may take two forms

(i) ldquoStandardrdquo bankruptcy proceedings Standard bankruptcy proceedings may involve four separateprocedures ndash supervision procedure financial sanation procedure external management procedureliquidation procedure

i Supervision is a mandatory procedure which must be followed at all times to start bankruptcyproceedings At the supervision the bankruptcy manager accumulates information concerning financialstatus of the debtor The supervision stage is terminated upon the convocation of the first meeting of thecreditors At the first meeting of the creditors the creditors may decide to introduce the financialsanation or external management procedure (which are not mandatory) or directly proceed to theliquidation procedure

Financial sanation procedure may be introduced by the decision of the creditors approved by the courtAt the financial sanation stage a debtor presents a scheme of repayment of the debts This scheme mustbe approved by the meeting of the creditors If the debtor succeeds in repaying its debts then thebankruptcy proceedings are terminated However the creditors may choose to introduce externalmanagement procedure or may directly proceed to the liquidation of the company

External management procedure may be introduced on the motion of the creditors meeting subject to theapproval by the court At the external management stage the bankruptcy manager takes actions aimed atimproving of the debtorrsquos financial state Such actions may include change of the business activity of thecompany partial sale of the debtorrsquos assets and other measures

Liquidation procedure is the ultimate stage of the bankruptcy proceedings at which the assets of thedebtor are distributed among the creditors on the pro rata basis

(ii) ldquoSimplifiedrdquo bankruptcy proceedings The simplified bankruptcy proceedings may be initiatedwhen the actual location of the debtor cannot be established or the debtor ceased its commercialactivity Under the simplified bankruptcy proceedings such procedures as supervision financial sanationexternal management are skipped The only procedure to be followed under the simplified bankruptcyproceedings is the liquidation procedure


The creditor(s) and the debtor may come to an amicable agreement at any stage of the bankruptcyproceedings The conclusion of the settlement agreement terminates bankruptcy proceedings Thesettlement agreement is subject to the courtrsquos approval and for this reason such procedure cannot bedeemed as entirely informal

281


As the primary purpose of all bankruptcy proceedings is to achieve the balance of interest between thecreditors and the debtor none of the procedures grants any particular advantage to the creditor or to thedebtor


The insolvency proceedings may be initiated both by the creditor and the debtor

(i) The initiation of the bankruptcy proceedings by the creditor is possible if

a the debt exceeds 100000 Russian Roubles (3200 Euro approximately) with regard to legal entities2The insolvency proceedings may be initiated only if the indebtedness is confirmed by a court decision

b the above debt is past due over three months

(ii) The debtor is obliged to file petition if it is unable to fulfill all outstanding obligations or hisoverall indebtedness exceeds 100000 Russian Roubles and in other cases of financial distress providedin the Federal Law ldquoOn Insolvency (Bankruptcy)rdquo (the ldquoBankruptcy Lawrdquo)


Petition for bankruptcy must be filed with state arbitrazh (commercial) court at the domicile of thedebtor Documents evidencing the indebtedness of the company or its inability to fulfill its obligationsmust be annexed to the petition Exhaustive list of the documents to be annexed to the bankruptcy petitionis set forth in the Bankruptcy Law


Please see comment 24 above


The level involvement of the court is very high the court approves the bankruptcy manager approvesthe introduction of each bankruptcy procedure sets the time frames for bankruptcy proceedings gives itsconsent for the creditors to be entered into the creditors register approves settlement agreement


The insolvency proceedings must be completed within 13-18 month from filing the petition However inpractice it takes about 2 years to complete bankruptcy proceedings And some complex procedures maylast up to 5 years and longer


Bankruptcy manager has to post a notification concerning the bankruptcy of the debtor within ten daysfrom the date of the judgment which confirms the insolvency of the debtor


The debtor enjoys the following benefits

(i) The creditors may enforce their claims to the debtor only by means of entering into the register of thecreditors

282

(ii) Moratorium on enforcement of all court decisions against the debtor ie the enforcement of the courtdecisions against the debtor is suspended


As we believe the ldquofinancial sanation procedurerdquo to some extent resembles ldquodebtor in possessionprocessrdquo However there may exist some special features of the ldquodebtor in possessionrdquo process underthe US law that we are not aware of


Please see p82 QA concerning recognition and enforcement of foreign awards


We believe that influence of political factors on the bankruptcy proceedings is minimal however somefactors of public policy may come into play It is important to mention that ldquoThe Bankruptcy Lawrdquoestablishes its own regime for bankruptcy proceedings of township forming enterprises and agriculturalenterprises The bankruptcy proceedings of the company involved in the business activity protectedunder the Federal Law ldquoOn official secretrdquo will be conducted under the supervision of the competentstate authorities

3 Creditor issues


An unsecured creditor included in the register of creditors obtains a right to pro rata distribution of thedebtorrsquos assets according to its share in the overall indebtedness of the debtor As the debtor is in thestate of bankruptcy this fact normally implies that the assets of the debtor are insufficient to cover theentire indebtedness Typically only a small proportion of the debtorrsquos property remains after thesettlement of the debts of the first two ranks of creditors

Secured creditors are in a better position as they will recover 70 of the proceeds from sale of thesecured asset (please see 32 below)3


The creditor may enforce its security by means of foreclosure In case of the foreclosure the creditorwill recover 70 of the asset value 30 will be used to cover the claims of the creditors of the firstand the second rank priority as well as the court and bankruptcy manager expenses


The set off is not allowed if such set off establishes the priority of one creditor over the other creditors


There is no difference between the inter-company debts and debts from the other creditors


Subsidiary liability may be imposed on the ldquocontrolling personsrdquo of the company The term

283

ldquocontrollingrdquo refers to all persons (both physical and legal) whose actions or omissions of actionsresulted in the bankruptcy of the company The term ldquocontrolling personrdquo also includes such personswho control the business activity of the company or who could give mandatory instructions to themanagement of the company or the person who controlled more than 50 of the issued stock of thecompany The prescription period for holding controlling person subsidiary liable is 2 years from thetime of filing the petition for bankruptcy

The creditors may form two types of bodies to manage the bankruptcy proceedings

(i) General Meeting of the Creditors The general meeting of the creditors shall be established at alltimes All creditors enlisted in the register of creditors may be present at general meeting of thecreditors The number of votes one creditor may have depends on its share in the total indebtedness ofthe creditor The decisions of the general meeting of the creditors are taken by the simple majority ofvotes The competence of the general meeting of the creditors includes the following matters formationof the creditors committee appointment of the bankruptcy manager remuneration of the bankruptcymanager initiation of financial sanation external management and liquidation procedures approval ofthe settlement agreement and other matters

(ii) Creditors Committee Creditors Committee is formed by the General Meeting of the Creditors Theformation of the Creditors Committee is not obligatory if the number of the creditors does not exceed 50persons Each member of the creditors committee has one vote Members of the creditors committee areelected on the proportional basis The number of the members of the creditors committee shall be noless than 3 but no more than 11 persons (only individuals) The competence of the creditors committeeincludes the following issues requesting information from the debtor concerning its financial statusfiling a complaint against the bankruptcy manager convocation of the general creditors meeting andother powers listed in the Bankruptcy Law If the creditors committee is not established then the generalmeeting of the creditors exercises all the said powers



The control of the company depends on the stage of bankruptcy proceedings

(i) Under the Supervision and Financial Sanation procedure the governing bodies of the company retaintheir control over the company Some transactions (alienation of 20 of the assets of the debtor etc) aresubject to the written approval by the bankruptcy manager

(ii) If the general director of the debtor fails to comply with the provisions of the Bankruptcy law thebankruptcy manager may file a petition to dismiss the director and appoint new director

(iii) Under the External Management procedure and Liquidation procedure the company is controlled bythe bankruptcy manager appointed by the court who takes the control over all the business activities andaffairs of the company


All expenses incurred during the bankruptcy proceedings are indemnified by the debtor These expenseshave priority over the claims of the bankruptcy creditors However under simplified bankruptcyproceedings the initiating creditor has to issue a letter stating that the creditor agrees to finance all the

284

expenses relating to the simplified bankruptcy proceedings


Financing of the creditor may be organised under Supervision Financial Sanation External ManagementProcedures However the lender does not enjoy any preference with regard to the other creditors as allcreditors are treated equally in accordance with their rank (see 53 above)


All the claims of the employees concerning their salaries and severance payments fall into to the secondrank of priority of the creditors However if the funds of the debtor are insufficient to cover all theclaims of the employees the funds are distributed pro rata among them and the obligations of the debtorare discharged


The bankruptcy manager has a right to terminate contracts under performance (this option is available atthe external management stage and not available at any other stage of bankruptcy) If the contract isalready performed the bankruptcy manager can not exercise such right unless the contract falls within thecategory of ldquosuspiciousrdquo transactions or other transactions of the same nature



The creditor shall provide the court the debtor the bankruptcy manager with the documents evidencingthe indebtedness and substantiating his claim The creditor may be added to the register of the creditorsonly with the permission of the court


All claims shall be filed within 30 days starting from the publication of the notification concerning theinsolvency proceedings (Please see 29 above)


Under the Russian Law there exist three ranks of claims (creditors) However court expenses andbankruptcy manager expenses have priority over the claims of all three ranks of creditors

(i) The first rank ndash claims connected with body injuries other injures to health

(ii) The second rank - claims of the employees regarding their salaries and severance paymentsRoyalties to the authors of the pieces of intellectual property are included in the second rank ofcreditors

(iii) The third rank ndash claims of the other creditors including the claims secured by pledgemortgage

The claims of the creditors will be satisfied in the following manner The property will be primarilydistributed among the first rank creditors on pro rata basis If any property is left then it will bedistributed among the second rank creditors The remainder will be distributed among third rankcreditors

285



There exists no such procedure


(i) Under Financial Sanation and External Management procedures bankruptcy proceedings areterminated if the debtor regained its ability to repay its debts

(ii) Under the Liquidation Procedure the bankruptcy manager shall provide the report to the court uponthe expiration of the insolvency proceedings period set forth by the court Upon the provision of thereport the court closes the bankruptcy proceedings and forwards the notice to the Federal Registrar ofLegal Entities on the liquidation of the debtor (within 30-60 days)

(iii) Amicable settlement approved by the court terminates insolvency proceedings at any stage


As it was mentioned in p 53 of the Questionnaire there exist three ranks of creditors under the RussianLaw The first two ranks (persons with body injuries and former employees of the debtor) are in a morefavourable position as they are more likely to recover proceeds from the sale of the debtorrsquos estate



No


If the actual location of the debtor can not be identified or the debtor ceased its commercial activity thenthe procedure of simplified bankruptcy will apply In case of the simplified bankruptcy the supervisionfinancial sanation external management stages are skipped



Under the conflict of laws provisions of the Civil Code the bankruptcy matters are governed by the lawsof the state of incorporation of the debtor Subsequently the bankruptcy proceedings of the Russian entitywill be governed by the ldquoBankruptcy lawrdquo whereas the bankruptcy proceedings with respect to theforeign company will be governed by the laws of the state of incorporation of that foreign entityHowever this does not preclude the foreign creditor from participation in the bankruptcy proceedings ofthe Russian legal entity

286


It is important to indicate the difference between the bankruptcy proceedings against Russian and foreignlegal entities

(i) Russian legal entities The bankruptcy matters are under the special jurisdiction of the state arbitrazh(commercial) courts The term ldquospecial jurisdictionrdquo implies that only state arbitrazh (commercial)courts are competent to hear the bankruptcy disputes with regard to Russian legal entities Subsequentlybankruptcy proceedings against Russian legal entities may be initiated only by filing a petition within thestate arbitrazh court The bankruptcy proceedings against Russian legal entity can not be initiated in anycourt of any other jurisdiction Still if such proceedings against a Russian entity are initiated suchbankruptcy awards will not be enforced in Russia

In the YUKOS Case (А40-301605-132-33) the debtor (YUKOS Oil company) filed a petition forbankruptcy within the Texas district court and sought injunction restraining all actions with respect to theYUKOS assets Then YUKOS attempted to enforce the Texas court decision in Russia Ninth AppellateCourt (Russia) refused to recognize and enforce the decision of the Texas Court The Ninth AppellateCourt stated that YUKOS is a company incorporated under the laws of Russia subsequently it is subjectto the Russian Bankruptcy Act and exclusive jurisdiction of the Russian state arbitrazh (commercial)courts

(ii) Foreign legal entities Under the Bankruptcy law and Arbitrazh Procedural Code foreign judgmentson bankruptcy matters can be recognized and enforced in Russia on the basis of an international treaty Inabsence of a specific treaty the foreign award on bankruptcy may be recognized and enforced on thebasis of the reciprocity principle

a To our best knowledge the Russian Federation is not a signatory to any international treaty governingbankruptcy matters So it is hardly possible to enforce foreign award on bankruptcy in the RussianFederation

b It is important to mention that under the case law of state arbitrazh (commercial) courts foreign legalproceedings against foreign legal entities have no effect within the territory of the Russian Federation

c In the Case N А40-290508-62-3 the US mother company owned stock of shares in the charter capitalof the Russian legal entity Then the mother company filed petition for bankruptcy under the Delawarelaw and passed the title to shares to its US creditor The US creditor filed a petition to the registrar ofthe Russian company in order to enter into the register as a new holder of the said shares The Registrarrefused to take the requested action The state arbitrazh court supported the registrar stating that theforeign court decision (the decision of the Delaware court) may be enforced only on the basis of aninternational treaty In absence of the international treaty the foreign court decision has no legal effectwithin the territory of the Russian Federation As the Russian court did not recognize the US courtdecision the title to the said shares was not transferred

287

Serbia

Igor Živkovski Attorney at Law Živkоvić Sаmаrdžić Law Office

wwwzslawrs email igorzivkovskizslawrs tel +381 11 2636 636



There are few ways how creditor might take security over assets Some of those are

1 Pledge

2 Mortgage


Bankruptcy debtor may take legal transactions and other actions before the opening of the bankruptcyproceedings that are interfering with equal settlement of bankruptcy creditors or damaging the creditorsas well as transactions and actions putting some creditors in a more favorable position over the othersIn this case bankruptcy administrator may contest these actions by lawsuit filing Any securities givenfor loans to associated persons with bankruptcy debtor may also be invalid if they are created withinone year of the bankruptcy opening or in period of longer insolvency


A director shall be liable to a company for any damage heshe causes to it by violating the provisions ofSerbian Law on Companies the Articles of Association or a decision of the General Meeting

Notwithstanding the foregoing a director shall not be liable for damage if heshe acted in accordancewith a decision of the General Meeting

If the damage referred to in paragraph 1 of this answer occurs as a result of a decision of the Board ofDirectors all directors who voted in favour of such decision shall be liable for the damage

In cases referred to in paragraph 4 of this answer any director who abstained from voting shall bedeemed to have cast an affirmative vote for the purposes of establishing liability for damage

In cases referred to in paragraph 4 of this answer any director did not attend a meeting in which theBoard of Directors passed the decision in question and did not vote in favour of such decision by othermeans shall be deemed to have cast an affirmative vote for the purposes of establishing liability fordamage unless heshe opposed the decision in writing within eight days of learning of its passing

A companyrsquos damage claims in accordance with this answer shall be time-barred after three years ofoccurrence of damage

A company may not waive a damage claim except by a decision of the General Meeting passed by athree-quarters majority of the voting power present subject to an understanding that such decision may

288

not be passed if it is opposed by shareholders holding or representing minimum 10 of a companyrsquosshare capital

2 Taking action


Available procedure for the company is reorganization Reorganization shall be conducted if thisensures more favorable settlement of creditors in relation to compulsory liquidation and especially ifeconomically justifiable reasons exist for the continuation of the debtors business

Reorganization shall be conducted in accordance with the plan of reorganization that shall be preparedin writing

The plan of reorganization may be filed concurrently with the petition for bankruptcy or after the openingof bankruptcy in accordance with this Law

If the plan of reorganization is filed concurrently with the petition for bankruptcy it shall be referred toas a prepackaged plan of reorganization


NA


Both creditor-friendlydebtor-friendly procedure is reorganization


Some of triggers for insolvency are companyrsquos inability to pay its debts within 45 days of the date theybecome due complete cease of all payments for a consecutive period of 30 days if company makes itapparent that it will not be able to pay its debts as they become due if if the liabilities of the companyexceed its assets


The bankruptcy proceedings shall be initiated by the petition of the creditor the bankruptcy debtor orthe liquidator

The creditor may initiate a bankruptcy proceeding in case of permanent insolvency of the debtor ornoncompliance with the adopted plan of reorganisation or in case the plan of reorganisation entered intoeffect in a fraudulent or unlawful manner

The bankruptcy debtor shall file the petition for bankruptcy if one of the grounds referred to in Article11(2) of Serbian Bankruptcy Law exists

The liquidator shall file the petition for bankruptcy in cases prescribed by legislation governing thelegal status of companies

The petition to open bankruptcy proceedings shall be filed with the appropriate court

289

The bankruptcy judge shall render a decision initiating the preliminary bankruptcy proceeding withinthree days from the day of the receipt of the petition for bankruptcy The preliminary proceedings areinitiated for the purpose of determining the existence of grounds for the opening of the bankruptcyproceeding

The decision initiating the preliminary bankruptcy proceeding may not be appealed

The bankruptcy judge shall decide to open the bankruptcy proceeding without the preliminaryproceeding if

1 The bankruptcy debtor submits the petition for initiating the bankruptcy proceeding accompanied withall required documents

2 The bankruptcy creditor submits the petition for initiating the bankruptcy proceedings and thebankruptcy debtor admits to the existence of the reasons for bankruptcy

3There is a presumption of permanent insolvency as defined in Article 12 of Serbian Bankruptcy Lawexists


Company can be placed into insolvency proceedings by initiating the petition of the creditor thebankruptcy debtor or the liquidator


A bankruptcy proceeding is conducted by the competent court according to the location of debtor Thebankruptcy judge shall

1 Rule on the initiation of preliminary bankruptcy proceedings

2 Establish grounds for bankruptcy and rule on opening of bankruptcy proceedings

3) Appoint and dismiss the bankruptcy administrator 4) Approve bankruptcy proceedings expenses andliabilities of the bankruptcy estate before they are paid

5) Determine the preliminary and final award and reimbursement of expenses of the bankruptcyadministrator

6) Rule on complaints against actions taken by the bankruptcy administrator

7) Consider the draft plan of reorganisation of the bankruptcy debtor and hold the hearing to consider thedraft plan of reorganisation or reject the draft plan of reorganisation

8) Confirm the adoption of the reorganisation plan or note that the plan has not been adopted

9) Render the decision on final distribution of the bankruptcy estate


It depends sometimes it takes few years


290

The bankruptcy administrator may take actions that have a significant impact on the bankruptcy estatesuch as obtaining credit raising a loan acquiring high value equipment and the like (hereinafter actionsof special importance) after having notified the bankruptcy judge thereof and having obtained theconsent of the creditors committee

The act of contesting bankruptcy debtors legal transactions by filing claims or otherwise shall not bedeemed an action of special importance

Bankruptcy creditors shall be given notice of the creditors assembly meetings and agendas by publicannouncements on the courts bulletin board and by advertisements in two high circulation dailynewspapers distributed on the entire territory of the Republic of Serbia unless the creditors assemblydecides otherwise

Lien creditors are bound to the deadline for submitting claims inform the court about the pledge overtheir claims against debtor which is not bankruptcy debtor but the third person

The authorized persons of the bankruptcy debtor attorneys and the persons who perform the financialduties and audits for the bankruptcy debtor shall provide the bankruptcy judge and the bankruptcyadministrator as required and without delay with all necessary data or information

A creditor who has filed the claim in the bankruptcy proceedings is obliged to report in claim if thereare guarantors of the obligation of the debtor as well as about the report claims promptly notify theguarantors

Bankruptcy administrator shall inform the excluding creditor whether heshe will honour or refuse therequest within the time period of 20 days from its receipt and shall specify the deadline within whichthe request shall be honored


During the financial restructuring is an introduced inaction debt that has legal effect on the conclusion ofa debt standstill

Agreement on the debt standstill is the basis for the suspension of the execution of the forced paymentfrom the account of the company in accordance of the claims of creditors who concluded contract aswell as the ban on filing and a stay of execution that was filed in the motion of the enforcement creditorwho concluded the contract

In the dormant period debt creditors who have concluded an agreement on debt standstill may not takeany actions to collect claims apart from submitting claims for payment of claims in order to prevent theoccurrence of obsolescence of its claims


NA


NA


NA

291

3 Creditor issues


Bankruptcy proceeding is a legal mechanism for the collective enforcement of the claims of the entirepayout row of unsecured creditors This collective mechanism sets instead of individual creditors rightsto initiate enforcement proceedings when debtor is unable to settle its liabilities The bankruptcyprocedure is regulated process that ensures fair and equal treatment of all creditors Creditors areclassified according to the bankruptcy proceedings in certain the extent to a higher payment priority(certain amounts of wages as well as the amounts claimed by funds insurance and tax authorities) aswell as general payout row of unsecured creditors


Creditors holding a security right a statutory right of retention or a right to satisfy their claims fromassets or rights registered in public registers or books shall be entitled to priority in distribution of theproceeds from the realization of such assets securing their right

The creditors referred to in paragraph (1) of this Article shall not be deemed bankruptcy creditors If thevalue of their claim is higher than the amount obtained from realizing a secured asset or right they shallsatisfy the remaining part of their claim as bankruptcy creditors

Secured claims acquired through enforcement proceedings or creating of a charge within 60 days beforethe date of opening the bankruptcy proceedings for the purpose of enforcement or security shall cease tobe valid such creditors shall not be deemed secured creditors Based on the decision of the bankruptcyjudge the authorized authority keeping the appropriate public books shall strike such security rights offthe books

There is also pledgee Pledgee hold a security right a statutory right of retention or a right to satisfytheir claims from assets or rights registered in public registers or books but the pledgee does not have aclaim against the bankruptcy debtor Furthermore the pledgee is not a secured creditor nor a bankruptcycreditor thus he cannot be appointed to the creditorsrsquo assembly and the creditors committee


Right to Offset Claims in Bankruptcy

If a creditor has acquired the right to offset his claim against the debtor with the debtors claim againstsuch creditor before the petition to open bankruptcy proceedings was filed the opening of bankruptcyproceedings shall not constitute grounds for the loss of the right to offset such claim The creditor shallbe obliged to file its claim and a statement of offset with the court before the expiry of the deadline forfiling claims otherwise it shall lose the right to offset

Exceptionally in case of rights and obligations arising from one or more financial contracts to which abankruptcy debtor is a party and which were concluded based on a framework contract between thesame parties in the period before the filing for bankruptcy the right to offset (netting) shall exist onlywith respect to such mutual rights and obligations and if the creditor has acquired in accordance withsuch framework contract the right to offset after the filing for bankruptcy was made but no later than atthe opening of bankruptcy proceeding by automatism or by way of notifying thereof the bankruptcydebtor no later than three days of the opening of bankruptcy on the grounds of the existence of reasonsfor bankruptcy the filing of the petition for bankruptcy or on the grounds of opening of bankruptcy

292

proceeding

Financial contract shall be deemed to be a contract setting the obligation of one or both parties thereto tomake a payment or deliver a specified commodity which has as its subject the transactions in financialderivatives such as swaps options futures forwards and other unnamed derivatives a repo transactionor securities lending and which is concluded in writing or orally provided that there is a written recordof the terms of such an oral financial contract in accordance with normal business practice for theconclusion of such contracts

Cases where Offsetting is not Permitted

Offsetting shall not be permitted if

1) The claim was ceded to the bankruptcy creditor within a period of six months before the petition toopen bankruptcy was filed and the creditor knew or ought to have known that the debtor is insolvent orover indebted

2) The creditor acquired the right to offset through a voidable transaction Exceptionally to paragraph1st of this answer offsetting shall be allowed if the claim in question was ceded in relation tofulfillment of unfulfilled contracts or was restored its legal effect by the successful voiding of a legaltransaction or other action of the bankruptcy debtor


NA


No


Yes and the creditors committee shall

1) Give its opinion to the bankruptcy administrator on the manner of selling the property if the propertyis not to be sold by public auction and give its consent on actions of special importance in accordancewith this Law

2) Give its opinion on continuation of the bankruptcy debtors business operations

3) Review reports of the bankruptcy administrator on the course of bankruptcy proceedings and the stateof bankruptcy estate

4) Approve the final account of the bankruptcy debtor

5) Review and require at own cost the delivery of copies of complete documentation

6) Inform the creditors assembly of its work if requested

7) Perform other activities stipulated in this Law


293


The bankruptcy administrator shall manage the business of and represent the bankruptcy debtor exceptwhere this Law provides otherwise

The bankruptcy administrator as well as persons performing activities of a bankruptcy administrator onbehalf of the organization established under a separate law to act as a bankruptcy administrator shallenjoy the status of an official within the meaning of the Criminal Code provisions governing the officialstatus


The financing is done primarily by selling property of bankruptcy debtor


NA


Creditorrsquo Committee

Creditors who are at the same time the employees of former employees of the bankruptcy debtor may nothave more than one of their representatives elected to the creditorsrsquo committee

Rank of Bankruptcy Claim

Satisfaction Bankruptcy creditors depending on their claims shall be classified into ranks Thebankruptcy creditors of lower rank can only be satisfied after the creditors of higher rank The first rankof claims shall comprise unpaid net salaries of employees and former employees in the amount of theyearly minimum wage for the year before the opening of bankruptcy with interest from due date to thedate of opening of bankruptcy and unpaid contributions for pension and disability insurance for twoyears before the opening of bankruptcy calculated using as a basis the minimum monthly contributionbase in accordance with regulations on compulsory social insurance contributions as at the day ofopening of bankruptcy as well as claims arising from contracts with companies which subject areunpaid contributions for pension and disability insurance for two years before the opening ofbankruptcy calculated using as a basis the minimum monthly contribution base in accordance withregulations on compulsory social insurance contributions as at the day of opening of bankruptcy

Liabilities of the Bankruptcy Estate

One of four liabilities of the bankruptcy estate is the liability towards the debtorrsquos employees arisingafter the opening of bankruptcy


If the debtor and its counterpart did not before the opening of bankruptcy fulfill obligations arising froma mutually binding contract in its entirety the bankruptcy administrator may on behalf of the debtorexecute the contract and demand from the other party to fulfill its obligations

If the bankruptcy administrator does not accept the fulfillment of the contract the other party may pursuehisher claim as a bankruptcy creditor

If the other party to the contract invites the bankruptcy administrator to state its position on fulfilling the

294

contract the bankruptcy administrator shall be obliged to inform the other party in writing within 15days of the receipt of such invitation of whether he intends to fulfill the contract

If the bankruptcy administrator upholds the contract but ceases fulfillment in the course of the bankruptcyproceeding any claims arising from the contract shall be considered a liability of the bankruptcy estate

Provisions of this Article shall apply to all bilaterally binding contracts unless other conditions forcertain contracts are prescribed by the Law of Bankruptcy



Creditors shall file their claims in writing with the bankruptcy court The Law on Bankruptcy prescribesmandatory elements of the claims


Submissions may be filed upon the expiry of the term set by the decision of the bankruptcy judge but notlater than 120 days from the day of publishing the announcement in the Official Gazette of the Republicof Serbia Any claims filed after the expiry of the period of 120 days shall be rejected as untimely


Upon the settlement of such expenses the costs of the bankruptcy estate shall be settled

Bankruptcy creditors depending on their claims shall be classified into ranks The bankruptcy creditorsof lower rank can only be satisfied after the creditors of higher rank Bankruptcy creditors of the samerank shall be satisfied in proportion to the amount of their claim

The rank of bankruptcy claims shall be as follows

The first rank of claims shall comprise unpaid net salaries of employees and former employees in theamount of the yearly minimum wage for the year before the opening of bankruptcy with interest from duedate to the date of opening of bankruptcy and unpaid contributions for pension and disability insurancefor two years before the opening of bankruptcy calculated using as a basis the minimum monthlycontribution base in accordance with regulations on compulsory social insurance contributions as at theday of opening of bankruptcy as well as claims arising from contracts with companies which subject areunpaid contributions for pension and disability insurance for two years before the opening ofbankruptcy calculated using as a basis the minimum monthly contribution base in accordance withregulations on compulsory social insurance contributions as at the day of opening of bankruptcy

The second rank shall comprise all public revenue claims that have become due over the last threemonths before the opening of bankruptcy except pension and disability insurance contributions foremployees

The third rank shall comprise claims of other bankruptcy creditors

The fourth rank shall compromise claims created two years before the day of opening bankruptcy whichare based on loans as well as other legal actions that in terms of economy correspond to loans approvalin part in which these loans are not secured but approved to the bankruptcy debtor by entities associated

295

with bankruptcy debtor in terms of the Law on Bankruptcy except those entities who are engaged inapproving credits and loans within its registered activity

Claims of bankruptcy creditors who agreed before the opening of the bankruptcy to be settled onlyafter the full settlement of claims of one or more bankruptcy creditors shall be settled only after the fullsettlement of the third payment rank and the full settlement of interest of creditors whose claims havebeen settled


NA



NA


At the final hearing the bankruptcy judge shall render a decision concluding the bankruptcy proceedings


The outlooks for all classes of creditors are primarily reflected in the value of assets of the bankruptcydebtor then the size of the property as well as the number of interested buyers An additional problemis the burden of the property secured right in other words the secured creditors and excretory havepriority in the collection Upon the settlement of the costs of the bankruptcy proceedings the rewardsand benefits than obligations of the bankruptcy administrator and obligations of the bankruptcy estate itcan begin with the payment of all classes of creditors



NA


NA



NA


296

The answers regarding this question you may find in relevant articles of section XII lsquorsquoCross-BorderBankruptcyrsquorsquo (The Law on Bankruptcy Official Gazette of the Republic of Serbia No 1042009992011 712012 832014)

Relevant Law

The law of the State where the proceedings were initiated shall govern the bankruptcy proceedingsunless otherwise stipulated herewith

In case of recognition of foreign proceeding under the Law on Bankruptcy the laws of the Republic ofSerbia shall apply to assets subject to excluding rights or secured assets located in the territory of theRepublic of Serbia

The law governing labor contracts shall apply to effects of bankruptcy proceedings on labor contracts

In Rem Jurisdiction for Recognition of Foreign Proceeding and Cooperation

Recognition of foreign proceedings and cooperation with foreign courts and other appropriate bodiesshall be performed by the court referred to in Article 15(1) of the Law on Bankruptcy in accordancewith the law (It is the Commercial Court)

Public Policy Exception

The appropriate court may refuse to take an action concerning a cross border bankruptcy case if theaction would be contrary to the public policy of the Republic of Serbia

Interpretation

In applying the provisions on cross border bankruptcy the appropriate court shall especially take intoaccount their cross border character and the need to promote uniformity in their application in goodfaith

Right of Direct Access

A foreign representative shall be entitled to apply directly to a court in the Republic of Serbia

When taking actions referred to in paragraph (1) of this Article by filing appropriate request orotherwise a foreign representative shall be required to submit the following for purposes of proving hisstatus

1) The decision opening the foreign proceeding and appointing the foreign representative either originalor a certified copy or transcription thereof translated into the language in official use at the appropriatecourt in the Republic of Serbia accompanied by proof of its enforceability under the applicable foreignlaw

2) A certificate issued by the foreign court or other appropriate body affirming the existence of theforeign proceeding and of the appointment of the foreign representative

3) In the absence of proof referred to in subparagraphs 1) and 2) of this paragraph any other proof of theexistence of the foreign proceeding and of the appointment of the foreign representative acceptable to theappropriate court in the Republic of Serbia

Jurisdiction in Case of Application by a Foreign Representative

297

An application filed with the appropriate court in the Republic of Serbia by a foreign representativepursuant to the Law on Bankruptcy shall establish jurisdiction of such court solely in the matter of theapplication

Application by a Foreign Representative to Commence a Proceeding under the Law on Bankruptcy

A foreign representative shall be entitled to apply to commence a bankruptcy proceeding if conditionshave been met to commence such a proceeding under the Law on Bankruptcy

Participation of a Foreign Representative in a Proceeding under this Law

Upon recognition of a foreign proceeding the foreign representative shall be entitled to participate in aproceeding regarding the debtor under the Law on Bankruptcy

Application for Recognition of a Foreign Proceeding

A foreign representative may apply to the appropriate court in the Republic of Serbia for recognition ofthe foreign proceeding in which the foreign representative has been appointed whereby the foreignrepresentative shall be required to prove his status as referred to in Article 182(2) of the Law onBankruptcy (In this paper section lsquorsquoRight of Direct Accessrsquorsquo)

An application for recognition shall be accompanied by a statement made by the foreign representativeidentifying all foreign proceedings in respect of the debtor that are known to the foreign representativetranslated into the language in official use at the appropriate court in the Republic of Serbia

Legal Effects of Recognition of a Foreign Main Proceeding

The consequences of recognition of a foreign main proceeding shall be as follows

1) Prohibition of initiating new or stay of continuation of proceedings concerning the debtors assetsrights obligations or liabilities

2) Prohibition on compulsory executions against the debtors assets and

3) Prohibition on transferring encumbering or in any way disposing of the debtors assets

The court may allow for exemptions from application of consequences referred to in paragraph (1) ofthis Article only in cases provided for by the Law on Bankruptcy for exemption of application ofconsequences of opening of bankruptcy as well as where it establishes that foreign main proceedingdoes not provide adequate protection of interests of creditors in the Republic of Serbia

The prohibition or stay referred to in paragraph 1(1) of this Article shall not affect the right tocommence individual actions or proceedings to the extent necessary to preserve a claim against thedebtor

The prohibitions referred to in paragraph (1) of this Article shall not affect the right to request thecommencement of a bankruptcy proceeding in the Republic of Serbia or the right to file claims in such aproceeding

Contesting Legal Transactions of Bankruptcy Debtor

Upon recognition of a foreign proceeding the foreign representative may contest legal transactions ofthe debtor in accordance with regulations on the contestation of legal transactions of the bankruptcy

298

debtor

In case of a foreign non-main proceeding the court shall be required to establish that contestation relatesto assets that under the Law on Bankruptcy should be administered in the foreign non-main proceeding

Intervention by a Foreign Representative in Proceedings in the Republic of Serbia

Upon recognition of a foreign proceeding the foreign representative may in accordance with the lawintervene in any proceedings in which the debtor is a party

The authority of a foreign representative shall be a preliminary issue in the proceeding referred to inparagraph (1) of this Article

Forms of Cooperation

The Cooperation and Direct Communication between Courts of the Republic of SerbiaBankruptcyAdministrator and Foreign Courts or Other Appropriate Bodies or Foreign Representatives may beimplemented by any appropriate means and in particular by

1) Appointment of a person or body to act at the direction of the court

2) Exchange of information by any means considered appropriate by the court

3) Coordination of the administration and supervision of the debtors assets and affairs

4) Approval or implementation by courts of agreements concerning the coordination of proceedings

5) Coordination of concurrent proceedings regarding the same debtor

Opening of a Bankruptcy Proceeding after Recognition of a Foreign Main Proceeding

After recognition of a foreign main proceeding a bankruptcy proceeding may be opened only if thedebtor has assets in the Republic of Serbia

Presumption of Grounds for Bankruptcy Based on Recognition of Foreign Main Proceeding

In the absence of evidence to the contrary the existence of grounds for bankruptcy shall be presumed if afinal decision exists on the recognition of foreign main proceeding against the bankruptcy debtor Thecourt shall not open bankruptcy proceeding if the debtor is able to prove that no grounds for bankruptcyreferred to in Article 11 of the Law on Bankruptcy exist (Article 11 provides the grounds forbankruptcy)

The information in this document is not intended to provide and does not constitute legal or anyother advice on any particular matter and is provided for general information purposes only

299

Singapore

Mark Yeo Director Engelin Teh Practice LLC

wwwetplawcom email markyeoetplawcom tel +65 6224 9933



Pledge ndash The existence of the security depends on possession of the asset being granted to the securityholder

Lien ndash Generally the existence of the security depends on possession of the asset being granted to thesecurity holder but can arise out of operation of law in certain circumstances

Charge ndash This is a creation of contract that generally does not transfer title to the security holder

Mortgage ndash This usually involves a conveyance or assignment of legal title in property subject to anequity of redemption A mortgage is treated as a charge for the purposes of the Companies Act (Cap50)

Charges on assets of companies incorporated in Singapore would require registration with ACRAotherwise the said charges are void against a liquidator or unsecured creditors in the event of a windingup of the said company


In the event of a winding up of a company and in relation to transactions entered into within a specifiedperiod prior to the commencement of the winding up the said transactions may be (subject to fulfillmentof certain conditions) void or voidable-

bull Where the transfer of property amounts to an undue preference

bull Where the transfer of property was done at an undervalue andor

bull Where fraud was involved

Any dispositions of the property of the company after the commencement of a winding up is void unlessthe court otherwise orders

Where a company goes into liquidation within 6 months from the creation of a floating charge thatcharge is invalid except to cover the amount of cash advanced to the company at the time of creation orsubsequently together with interest at 5 per annum - unless it is proved that the company was solventimmediately after the creation of the floating charge

If any charge that requires registration under the Companies Act (Cap 50) is not registered within theprescribed period or such extended period as the court may allow that charge is void against aliquidator or any unsecured creditor on the application for a winding up order against the said company

300


If a debt is contracted on behalf of a company and at the time that the debt was contracted the directorresponsible for doing so had no reasonable or probable expectation that the company would be able topay the debt that director may be-

bull Convicted of an offence and liable on conviction to a fine not exceeding S$2000 or to imprisonment ofnot more than 3 months and

bull Personally responsible without any limitation of liability for payment of the whole or any part of thesaid debt

If the business of a company has been carried out to defraud creditors or for a fraudulent purpose thedirector who knowingly played a part in the carrying out of business in that manner may by declarationof the court be personally responsible without any limitation of liability for all or any of the debts orother liabilities of the company as the court directs

2 Taking action


The main procedures are as follows-

Winding up ndash This is where a liquidator is appointed to realize the assets of the company and to pay offthe creditors of the company This leads to dissolution of the company

Judicial management (Section 227A of the Companies Act Cap 50) ndash where a judicial manager isappointed by the court with a view to achieve one or more of the following purposes-

bull The survival of the company or the whole or part of its undertaking as a going concern

bull The approval under Section 210 of the Companies Act (Cap 50) of a compromise or arrangementbetween the company and creditors andor

bull The more advantageous realization of the assets of the company compared to when the company iswound up

Scheme of arrangement (Section 210 of the Companies Act Cap 50) ndash where a scheme is proposed bythe company to rearrange the rights of creditors and members If the scheme is approved by the requisitemajority the scheme becomes binding on all creditors and members of the company subject toconfirmation and sanction by

the court


No specific informal procedures

It is open to the company to negotiate with its creditors on a case by case basis to compromise any debtsowed to those creditors


301

This will largely depends on the perspective of the creditor debtor and the objectives to be achieved

Winding up of the company is usually the last resort as the company will cease to exist upon completionof the liquidation

Judicial management andor the scheme of arrangements are generally used where the intention is tokeep the company alive and to carry on business as a going concern


Under the Companies Act (Cap 50) there are generally 2 tests for insolvency-

bull Inability to pay debts as they fall due (known as ldquocash flowrdquo or ldquocommercialrdquo insolvency and

bull An excess of total liabilities over assets (known as ldquobalance sheetrdquo insolvency)


Winding up There can be 2 forms of winding up namely winding up by the court or voluntary windingup The assumption here is that winding up is due to insolvency as winding up is also available on othergrounds

bull For winding up by the court (on the ground of insolvency) Generally an application to court ispreceded by a statutory demand for payment of a debt If the debt is then not paid or compromised within21 days it is presumed that the company cannot pay its debts when due and the creditor can then file anapplication for the winding up of the company based on this presumption The application is filedtogether with a supporting affidavit The application is usually fixed for hearing about 4 to 6 weeks fromthe date of filing The applying creditor has to carry out various filings and advertisements to complywith the statutory requirements prior to the said hearing if a winding up order is to be made at the saidhearing

bull For voluntary winding up (on the ground of insolvency) The sequence of events are as follows-

o The directors of the company may make a statutory declaration that the company cannot carry on itsbusiness by reason of its liabilities

o A provisional liquidator is to be appointed

o Meeting of the company and creditors must be summoned for a date within 1 month of the making ofthe declaration

o At the meeting of the company the resolution for winding up is passed and a qualified person isnominated to be the liquidator

o At the creditorsrsquo meeting to be held on the same or following day the creditors may choose aliquidator and if different from that of the company the creditorsrsquo choice will prevail

Judicial management Application is filed in court together with a supporting affidavit

Scheme of arrangement There are 3 stages First an application is filed in court for an order that one ormore meetings of members andor creditors be summoned Secondly the proposed scheme ofarrangement is put before these meetings and has to be approved by the requisite majority of each classIf the scheme is approved the court will then have to confirm and sanction the approved scheme in

302

another hearing


Winding up by the court The company itself a creditor a contributory the personal representative of adeceased contributory trustee in bankruptcy or the official assignee of the estate of a bankruptcontributory liquidator of the company a judicial manager or various ministers in certain specifiedinstances

Judicial management The company itself the directors (if so authorized) a creditor or by the creditorsjointly

Scheme of arrangement The company itself any creditor or member of the company a liquidator of thecompany or a judicial manager


Timing depends on each case andor whether there is opposition in the court process


Each of the insolvency processes described above generally have stay provisions to stop claims frombeing pursued in court against the company This provides some breathing space

The scheme of arrangement process allows the management of the company to retain control over thedebt restructuring process As for the winding up and judicial management the management of thecompany is displaced by the liquidator and judicial manager respectively


Yes this would be the scheme of arrangement procedure

3 Creditor issues


Unsecured creditors are affected by the stay provisions for each of the insolvency processes describedabove ndash which means that they are not able to proceed with claims or recovery of debts owed to themfor the duration of the stay

In a liquidation scenario unsecured creditors are only entitled to pari passu recovery on their debts andany uncompleted executions against the assets of the company commenced by unsecured creditors as atthe date of commencement of the winding up will be stayed


This depends on what rights the unsecured creditor is given under the security documentation

Generally if there is a right to appoint a receiver the secured creditor can do so as part of theenforcement of its security


303

Yes set-off will apply in insolvency proceedings For set-off to apply there must be mutuality of debts



Winding up The liquidator

Judicial management The judicial manager

Scheme of arrangement The management of the company


Financing of a company in insolvency proceedings would generally have be sought from private sourcesndash shareholders existing creditors etc This is subject to commercial considerations

In the liquidation scenario there will be generally no financing available and the liquidator willproceed with the liquidation with only the available existing assets the company


The terms in their respective employment agreements will continue to govern the rights of employeeseven where there are insolvency proceedings

The issue would be whether or not they continue to be employed by the company Termination ofemployment can generally be done by giving of adequate or contractual notice by the company employeror the employee themselves Unless contractually provided for there is no legal obligation on the part ofthe company to pay retrenchment benefits

Unpaid wages and salary are preferred debts in the liquidation of a company but are subject to theprescribed order of ranking of preferred debts as well as a prescribed limit The excess beyond theprescribed limit will be treated as an ordinary unsecured debt and be paid based on the pari passuprinciple


Much will depend on the terms of the contracts or the commercial arrangements

Usually insolvency proceedings are specified as events of default - which give the other contractingparties the right to terminate the contracts or commercial arrangements The exercise of such rights oftermination will generally be at the option of the other contracting parties There may however be someprovisions that provide for automatic triggers leading to prescribed consequences

Where the company is in liquidation the liquidator may be able to (subject to conditions) disclaimonerous property or contracts within 12 months of the commencement of winding up

304


What is the method of filing claims

The method of filing claims will be determined by the liquidator judicial manager or the schememanager (as the case may be) Generally this involves the submission by the creditors of proofs of debtsof their respective claims


Secured creditors need not prove for their debts and can realize their security to obtain full satisfactionIf their security is inadequate the excess debt is then treated as an unsecured debt and will be subject tothe ranking of unsecured debts set out below

In a winding up the order of priority of unsecured claims are generally as follows-

bull First cost and expenses of the winding up including the taxed costs of the applicant for the winding uporder the remuneration of the liquidators and the costs of any audit carried out on the liquidatorsrsquoaccounts

bull Secondly subject to a prescribed limit all wages or salary (whether or not earned wholly or in part byway of commission) including any amount payable by way of allowance or reimbursement under anycontract of employment or award or agreement regulating the conditions of employment of anyemployee

bull Thirdly subject to a prescribed limit the amount due to an employee as a retrenchment benefit or exgratia payment under any contract of employment or award or agreement that regulates conditions ofemployment whether such amount becomes payable before on or after the commencement of the

winding up

bull Fourthly all amounts due in respect of work injury compensation under the Work Injury CompensationAct (Cap 354) accrued before on or after the commencement of the winding up

bull Fifthly all amounts due in respect of contributions payable during the 12 months next before on orafter the commencement of winding up by the company as the employer of any person under any writtenlaw relating to employeesrsquo superannuation or provident fund or under any scheme of superannuationwhich is an approved scheme under the law relating to income tax

bull Sixthly all remuneration payable to any employee in respect of vacation leave or in the case of hisdeath to any other person in his right accrued in respect of any period before on or after thecommencement of the winding up

bull Seventhly the amount of all tax assessed and all goods and services tax due under any written lawbefore the commencement of the winding up or assessed at any time before the time fixed for proving ofdebts has expired

The preferred debts listed above (relating to employees) if not paid in full have priority over claims ofdebenture holders under a floating charge (as created was a floating charge) and can be paid out ofproperty subject to that floating charge

305



Yes to some extent - by way of the scheme of arrangement procedure

In the scheme of arrangement the minority of objecting creditors will be bound by a scheme ofarrangement once it has been approved by the majority of creditors and sanctioned and confirmed by thecourt


Winding up is concluded by the final distribution of realized assets to the creditors the order beingmade by the court for the release of the liquidator and for the company to be dissolved

Judicial management is concluded by the discharge of the judicial management order The judicialmanager vacates office when the judicial management order is discharged Judicial management is onlya temporary regime Unless extended by the court a judicial management order will be discharged after180 days

The scheme of arrangement procedure is concluded by the sanction of the court of an approved schemeor by the rejection of the scheme by the creditors of the company

306

South Africa

Eric Levenstein Director Lauren Becker Senior Associate Werksmans Attorneys

wwwwerksmanscoza email elevensteinwerksmanscom lbeckerwerksmanscom tel +27 (0)11535 8237 +27 (0)11 535 8196

South African restructuring and insolvency law is regulated by three principal pieces of legislationnamely the Companies Act 71 of 2008 (ldquoNew Actrdquo) the Companies Act 61 of 1973 (ldquoOld Actrdquo) and theInsolvency Act 24 of 1936 (ldquoInsolvency Actrdquo)

Whilst the New Act came into force on 1 May 2011 the Old Act remains applicable to certaininsolvency procedures not yet catered for by the New Act



There are a number of forms of security that a creditor can take to secure its exposure to a company orcorporation prior to a liquidation or business rescue These include mortgage bonds over immovableproperty special notarial bonds over specified movable assets general notarial bonds over nonspecified movable assets a pledge over movable assets or a cession over various movable assets suchas book debts Over and above this security there is also security that arises by operation of the lawsuch as the landlordrsquos tacit hypothec (lien) Different security gives different creditors a particularranking or status in a liquidation or business rescue

Further during business rescue proceedings any financiers that invest money (post-commencementfinance) in the company or corporation are entitled to secure their investment with any asset of thecompany that is not already encumbered and their claims (secured or unsecured) will rank close to thetop of the order of preference conferred on the claims of creditors in terms of the New Act and theInsolvency Act


In liquidation proceedings certain dispositions of assets that have been disposed of or preferencesconferred on one or other creditor within certain periods of time prior to the company or corporationgoing into liquidation may be set aside by the liquidator This could include taking security at a timewhen the company is insolvent Further dispositions made in collusion with one or more creditors priorto the company or corporation going into liquidation may also be set aside

In business rescue proceedings it is not clear at this stage whether or not any dispositions made by acompany or corporation prior to the commencement of business rescue can be set aside as voidabledispositions as they could in a liquidation However any dispositions of property or preferencesconferred in favour of any particular creditor or creditors in a business rescue will not be set aside ifthe company or corporation subsequently goes into liquidation provided they are sanctioned in terms ofa business rescue plan These transactions would have been sanctioned by creditors in the businessrescue plan This is provided of course that such transactions were validly concluded in an effort tofacilitate the business rescue process and in the interests of the company and all stakeholders and not

307

for fraudulent purposes


In terms of both the New Act and the Old Act a director of a company may be held personally liable fortrading a company recklessly with gross negligence with intent to defraud creditors or for a fraudulentpurpose The level of personal liability that a director may incur has in some instances been augmentedby the provisions in the New Act

When a company or corporation is insolvent or financially distressed and it continues to incur credit at atime when the directors know full well that the company or corporation will not be able to pay suchcreditors the directorsrsquo conduct may attract personally liability on either of the above grounds

In respect of business rescue the New Act obliges directors to notify creditors shareholders andemployees (or their representatives) of the fact that a company is financially distressed and if they donot intend to utilise business rescue proceedings notwithstanding the companyrsquos financial distress thereasons why the directors do not want to place the company or corporation in business rescue Adecision to send out this particular notice must be well considered as it may give rise to unintendedconsequences such as personal liability for directors or it may constitute an act of insolvency

2 Taking action


South African law distinguishes between rescue procedures for companies or corporations that arefinancially distressed and insolvency or liquidation proceedings for those that are insolvent

In terms of the New Act a new procedure called business rescue has been introduced into our law forcompanies or corporations that are financially distressed This is essentially a form of administration Ifa company is insolvent companies or corporations may be placed in liquidation

A further alternative available to companies or corporations is the compromise procedure contained inthe New Act It allows a company to enter into an arrangement with its creditors to compromise its debtWhilst regulated by the New Act it is a more informal procedure and can also be effected duringwinding-up proceedings


A company or corporation may want to convene a meeting of its creditors and attempt to reach anagreement with them to compromise their debt Such an agreement must be accepted by all of thecreditors of the company for it to be binding on all creditors and a undertaking should be furnished bythe creditors that they will not proceed to liquidate the company


Liquidations are traditionally more creditor-friendly They aim to ensure that the creditors of thecompany or corporation receive the maximum dividend or value for their claims

Business rescue on the other hand is more debtor friendly in that a moratorium is placed on the rights ofclaimants in respect of the institution andor enforcement of their claims against the company orcorporation or in respect of property belonging to the company or corporation or lawfully in its

308

posessions with the ultimate aim to provide the company or corporation with breathing space in anattempt to restore the company or corporationrsquos solvency or liquidity or if this is not possible to achievea better dividend for the creditors and shareholders of the company or corporation than would aliquidation

The difference between business rescue and a compromise in terms of the New Act is that with acompromise there is no moratorium that arises by operation of the law and thus the process could inessence be said to be more supportive of the interests of creditors (as they can still enforce their claims)than would be the position with a business rescue


A company will be financially distressed when it appears to be reasonably unlikely that the companywill be able to pay all of its debts as they become due and payable within the immediately ensuing sixmonths (commercial insolvency) or it appears to be reasonably likely that the company will becomeinsolvent (ie with its liabilities exceeding its assets) within the immediately ensuing six months (factualinsolvency) The test for financial distress is thus a forward looking test It attempts to contemplate thesituation in which the company will find itself in the ensuing six months This test is used to determinewhether a company or corporation should commence businesss rescue

On the other hand a company will be held to be insolvent if its liabilities either exceed its assets(factual insolvency) or if it cannot pay its debts as and when they fall due (commercial insolvency) Theformer is the more appropriate test for companies or corporations in that very often a company orcorporation will be factually insolvent but not commercially insolvent

The compromise procedure in the New Act however can be used if a company is financially distressedor insolvent but not if a company is under business rescue


A company or close corporation can be placed in business rescue voluntarily by the board of directorsadopting and filing a resolution to commence business rescue and to place the company under thesupervision of a business rescue practitioner Thereafter a number of forms and documents would needto be submitted to the companies office for filing A formal application can also be made to court byaffected persons (creditors employees shareholders) to place a company in business rescue(compulsory business rescue) Once the company is placed in business rescue the order of the courtmust be provided to all affected persons notifying them of the commencement of business rescue Avoluntary business rescue application cannot be filed if a compulsory business rescue application hasbeen initiated or if liquidation proceedings have already been initiated by or against the company

Importantly the provisions of the New Act apply only to the liquidation of solvent companies orcorporations whilst the provisions of the Old Act apply to the liquidation of insolvent companies

A company or corporation may be liquidated voluntarily (at the instance of the creditors ofshareholders) by the passing of a resolution to that effect and by thereafter filing such resolution andvarious other forms and documents with the companiesrsquo office or pursuant to a formal application tocourt Thereafter notice of the liquidation order would be served on all affected parties in accordancewith the directions provided by the court order


A company or corporation can be placed in business rescue voluntarily by virtue of the board ofdirectors passing a resolution to place the company or corporation in business rescue and under the

309

supervision of a business rescue practitioner Further a creditor shareholder or employee (or thelatterrsquos representative) can make formal application to court to place the company in business rescue(compulsory business rescue)

Generally speaking a company or corporation may be liquidated voluntarily by virtue of the passing ofa resolution to that effect by the directors of the company on the instruction of the creditors orshareholders or on application by the company a business rescue practitioner a creditor or group ofcreditors a director or directors or shareholders among others on application to court


Compulsory business rescue applications and liquidation applications require the involvement of thecourts for initiation of the process whilst voluntary procedures do not The compromise procedurebrings about little involvement by the courts Courts will from time to time be involved when there aredisputes that cannot be resolved


Business rescue proceedings are designed to take 3 months from start to finish But in practice it hasbecome clear that this period is too short and is often extended from time to time provided the businessrescue practitioner procures the requisite support of the creditors The time period may be truncated orlengthened depending on whether or not the company in distress requires further time to implement thebusiness rescue or for example is caught up in lengthy litigation

Liquidation proceedings from start to finish can take anything from 6 months to 5 years depending on thesize of the estate and the nature and complexity of the transactions with which the company orcorporation was involved Once the company or corporation is placed in liquidation a liquidator isappointed and he or she is tasked with gathering up all the assets and realising them for their maximumvalue by private treaty or public auction In so doing the liquidator will prepare various liquidation anddistribution accounts and once confirmed by the Master of the High Court will allocate the payment ofdividends to various creditors in a particular order of preference


Both compulsory and voluntary business rescue procedures and liquidations (both voluntary andcompulsory) require the publication andor filing of various notices which depends in some instanceson the manner in which the business rescue or liquidation unfolds


A liquidated company is exonerated from its liability to creditors

A company that has been placed under business rescue will have the benefit of a moratorium on allclaims against the company or in respect of property in its possession or belonging to it until such timeas the business rescue proceedings have ended Further the claims of the creditors are likely to becompromised pursuant to the preparation of a business rescue plan and once a plan has been adoptedand implemented the company is likely to continue to trade on a solvent basis or if this is not the casethen at the very least the company should achieve a better dividend for the creditors and shareholdersthan they would receive in a liquidation

With the compromise procedure if the compromise is accepted and adopted in accordance with theprovisions of the New Act the claims of creditors may be compromised depending on the arrangementreached

310


Business rescue is the process in South Africa that is most akin to what is commonly known as aldquodebtor-in-possession processrdquo


In business rescue and liquidation proceedings labour legislation may need to be carefully consideredwhen the company intends to either retrench its staff or when the company is sold as a going concernFurthermore in both liquidation and business rescue proceedings if the company is sold by way of asale of shares Competition Commission approval may be required The finalisation of the liquidation orthe implementation of the business rescue plan may be subject to the fulfilment of this suspensivecondition Further depending on the nature of the business under rescue or liquidation (and if thebusiness is acquired out of liquidation regarding the latter) regulatory approvals may be required Thistoo would be a suspensive condition to the finalisation of any liquidation or the implementation of thebusiness rescue plan


The introduction of the New Act into South African law has changed the landscape of company law inSouth Africa In this regard one of the primary objects of the New Act is to provide for the efficientrescue and recovery of financially distressed companies or corporations in a manner that balances therights and interests of all stakeholders (ie the company creditors shareholders and employees) Whilstliquidations are still common practice in South Africa their use has declined since the introduction ofbusiness rescue into our law Efforts are now being focussed on rescuing companies where appropriatebefore considering liquidation and attempts are made to balance the rights of all stakeholders Thesetwo factors may come into play at different points in the business rescue process However the same isnot likely to be considered in the liquidation or the compromise procedure

3 Creditor issues


Unsecured creditors in both business rescue and liquidation proceedings must file their claims with thebusiness rescue practitioner or liquidator respectively and annex evidence which supports their claimIn liquidation and business rescue proceedings unsecured creditors may be preferent or concurrentcreditors Concurrent creditors rank behind all the secured and unsecured creditors and will receive anegligible dividend if any on a liquidation

In a business rescue depending on how the business rescue plan is structured concurrent creditors mayor may not receive a dividend Generally though concurrent creditors would receive some cents forevery Rand of their claim in order to make the plan more attractive to them than would occur in aliquidation which may realise no dividend at all for concurrent creditors This would in turn influencethe manner in which concurrent creditors vote on a business rescue plan


The enforcement of security depends on the nature of the security held and generally but not alwaysneeds to be perfected prior to the commencement of liquidation or business rescue proceedings Theavenue of the courts is also always open to a creditor who wishes to enforce its security

311


A right of set-off applies unless the parties have excluded the operation of set off by a prior agreementbetween them The debts between two parties are extinguished or reduced (as the case may be) at themoment when they first become capable of being set off However once liquidation proceedings havecommenced and a concursus creditorum is formed (ie crystallisation of the creditors claims) set-off isnot permissible unless it was applied between the parties in the ordinary course of their business andprior to the commencement of liquidation

In business rescue proceedings despite the moratorium on the claims of creditors against a company inbusiness rescue set-off against any claim made by the company in any legal proceedings irrespective ofwhether those proceedings commenced before or after the business rescue process will be applicableAccordingly set-off is permitted in business rescue proceedings


Inter-company debts are treated in the same way as claims of third party creditors in liquidation orbusiness rescue proceedings


As a matter of course creditors are only entitled to enforce their rights to their claims with the debtorcompany or corporation and not with an associated or affiliated entity Only where a third party hasstood surety for the debtor company or guaranteed the obligations of the debtor company and where theright of the third party against the surety or guarantor remains extant can such creditor enforce his or herright against such third party provided the creditors claim has not been compromised This is theposition in both liquidation and business rescue proceedings


In liquidation proceedings a creditorsrsquo committee is not formed but the liquidator will call variousmeetings of the creditors at which meetings it will receive claims and take certain instructions from thecreditors

In a business rescue the business rescue practitioner will ask the creditors at the first meeting ofcreditors if they wish to form a creditors committee and may appoint members to such committeeThrough the committee the creditors are entitled to engage with and be engaged by the business rescuepractitioner in the development of the business rescue plan They are not permitted to give directions tothe business rescue practitioner Generally speaking creditorsrsquo committees will only be established inmatters where there are a many creditors making it more manageable for the business rescuepractitioner to communicate with the general body of creditors



In liquidation proceedings the liquidator controls the company and its assets vest with him or her Inbusiness rescue proceedings the business rescue practitioner has full management control of thecompany and the directors though not exonerated from their duties and responsibilities (andcorresponding liabilities) are answerable to the business rescue practitioner Any action taken by adirector whilst the company or corporation is in business rescue which requires the approval of the

312

business rescue practitioner and where approval is not sought will be void


During liquidation proceedings the company is funded through the proceeds received from a sale of thecompanys assets To the extent that there is not enough free residue in the estate to defray the costs ofadministering the estate the creditors who have proved claims in the estate will be required to make acontribution to the liquidated estate to cover the administration costs

In business rescue proceedings the company is funded by financiers or suppliers who provide ldquopost-commencement financerdquo This is finance that becomes available to the company or corporation post thecommencement of business rescue or the credit provided by creditors who continue to supply thecompany whilst in business rescue In terms of the New Act monies that become due and owing toemployees during business rescue are also considered to be post-commencement finance


In business rescue proceedings debtor-in-possession funding (referred to as post-commencementfinance) is possible but not in liquidation proceedings


In liquidation proceedings employment contracts are immediately suspended for a period of time andmay in time be cancelled by a liquidator after he or she has given due consideration to appropriatemeasures to prevent cancellation of employment contracts and in turn retrenchment All suspendedcontracts not already terminated by the liquidator will be automatically terminated 45 days after thedate of the final appointment of the liquidator

Employment contracts remain of full force and effect during business rescue proceedings and may not beamended without the agreement of the employee and in any event only in accordance with labourlegislation Further employees may not be automatically retrenched during business rescue proceedingsand the provisions of our labour legislation must be followed despite the fact that the company is infinancial distress


Generally speaking in the absence of an express statutory provision to the contrary all contractsconcluded with the company remain in effect when the company is placed in liquidation However theliquidator cannot be expected to render specific performance in terms of the contract as the liquidatorwill need to act in the best interests of the company The liquidator will therefore need to decide withina reasonable period of time whether or not he or she intends to continue with the contract

In business rescue proceedings contracts concluded between the company or corporation prior to thecommencement of business rescue remain of full force and effect The business rescue practitioner hasthe discretion to either suspend the contract or to cancel it but the latter can only be done on applicationto court

Insofar as contracts afford the counterparty with an opportunity to terminate such contract as a result ofthe occurrence of a business rescue or liquidation such party would also be entitled to cancel suchcontract


313


In liquidation proceedings creditorsrsquo claims are filed on affidavit and supported with evidence toindicate that the company is in fact indebted to the creditor

In business rescue proceedings the procedure is less formal and the claim need not be submitted onaffidavit In practice business rescue practitioners compile their own forms and produce them to thecreditors for the submission of creditorsrsquo claims


In liquidation proceedings a creditor must file his or her claim with the liquidator at the first or secondmeeting of creditors Thereafter if the creditor wishes to file a claim he may ask to convene a special orgeneral meeting at which meeting he or she will file his or her claim The costs of convening suchmeeting will be for that creditorrsquos account Only creditors who have proved their claims will benefitfrom a distribution Former employees and in some instances employees of the liquidated estatehowever need not submit formal claim forms

In business rescue proceedings there is no specific time period within which a business rescuepractitioner may receive claims Typically claims are submitted at the first meeting of creditors andthereafter up until such time as the business rescue plan is published by the practitioner for theconsideration of all affected persons The practitioner may however determine a date by which allclaims must be submitted In some instances practitionerrsquos take account of the position of all creditorswhether or not they prove their claims when preparing the business rescue plan This is an aspect of theNew Act which has yet to be determined by our courts


In liquidation proceedings the claims of creditors rank in a particular order of preference as prescribedby the Insolvency Act namely (i) costs of administration of the liquidated estate (ii) secured creditors(paid out of the proceeds of their security first) (iii) costs of liquidation (ie costs of the application tocourt) (iv) costs of execution (costs of the sheriff and the persons used to assist in the realisation andexecution of the assets) (v) payment of salaries and remuneration to employees (vi) statutoryobligations (ie payment of taxes) and (vii) the remainder of the free residue is paid to concurrentcreditors This position will be altered if business rescue proceedings supersede the liquidationproceedings

In business rescue the free residue is used for the fees of the business rescue practitioner and thereasonable expenses incurred in administering the business rescue rank first thereafter the claims ofemployees for payments due and owing to them post the commencement of business rescue Once theaforesaid creditors are paid the remainder of the monies received (and any free residue) in businessrescue are applied to secured post-commencement financiers and then unsecured post-commencementfinancier and thereafter to creditors who were secured prior to the commencement of business rescueThereafter any claims by employees prior to the commencement of business rescue as well as theclaims of all unsecured creditors will be satisfied This position will be altered if liquidationproceedings supersede the business rescue proceedings Secured creditors remain secured and are paidout of their security If their security does not cover their claim fully they are concurrent creditors forthe balance


Each matter will need to be considered on a case by case basis to the extent that any issue arises in

314

either liquidation or business rescue proceedings



Cram down procedures do not exist in respect of liquidations in South Africa but they do exist inrespect of business rescue proceedings Essentially the adoption of the business rescue plan requires thevote of 75 of the creditors voting at value and at least 50 of the votes of independent creditors mustsuppport the plan If a creditor votes against a business rescue plan and the plan is not adopted suchcreditors voting interest can be bought out at its liquidation value or the vote may be set aside onapplication to court as an inappropriate vote


In liquidation proceedings the liquidator will prepare various liquidation and distribution accountsOnce the final liquidation and distribution account is prepared and confirmed by the Master of the HighCourt the proceeds will be distributed to the creditors (and shareholders only thereafter) and the estatewill have been finally wound up

Business rescue proceedings will end when (i) the High Court sets aside the resolution or order thatbegan the business rescue proceedings or when the court converts business rescue proceedings intoliquidation proceedings (ii) a business rescue practitioner files a notice of termination of businessrescue proceedings with the companies office and (iii) when a business rescue plan has been proposedand rejected and no affected person has acted to extend the business rescue proceedings in any mannercontemplated by the New Act or when a business rescue plan has been adopted and the business rescuepractitioner has subsequently filed a notice of substantial implementation of the plan


In liquidation proceedings the probable dividend to be paid to creditors depends on the whether or notthe business is sold out of the liquidation and if not whether or not there is any value that can berealised from a sale of the assets either by private treaty or by public auction

In business rescue proceedings the dividend to be paid to creditors depends on the manner in which thetransaction is structured (ie asset sale sale of business or sale of shares) Generally speaking thoughin order for the plan to be attractive to creditors creditors they must be better off if they adopt thebusiness rescue plan than they would be if the company were to go into liquidation Without this therewould be little incentive for creditors to support a business rescue plan



The company or corporation and its creditor in an attempt to restructure and resuscitate an ailingcompany can engage in an informal compromise With this however the support of all creditors isneeded in order for the process to be a success as there would be no moratorium imposed on the claimsof creditors against the company or corporation as would arise in a business rescue It is also prudent insuch instances for an undertaking to be procured from the creditors confirming that they will not

315

proceed to liquidate the company


There are no formal processes other than business rescue liquidation or formal or informalcompromises with creditors



None


Historically South African courts in respect of cross border insolvency matters have been amenable torecognising foreign liquidators or administrators and to extend their powers to South Africa Recently aHigh Court in South Africa recognised the bankruptcy process of a foreign company and certainprovisions of the law applicable to that bankruptcy in South Africa

What is the involvement of attorneys

Attorneys are well placed to assist all role players involved in liquidations the business rescue orcompromise proceedings In our experience each role player be it a creditor shareholder or employeeof the insolvent company or company in distress or the liquidator or business rescue practitioner itselfwill always require the assistance of external legal counsel when considering its position within each oftheir processes

Werksmans Attorneys is at the forefront of insolvency and business rescue advisory in South Africa andhas a team dedicated to advising all role players on all aspects of the liquidation business rescue andcompromise process

316

Spain

Daniel Rueda Silva Senior Associate Director Mercantile Department Diaz-Bastien amp TruanAbogados

wwwdbtlexcom email druedadbtlexcom tel +34 91 577 36 60



Real estate Mortgage Must be notarized and registered at the Land Registry Attracts stamp duty theamount of which varies by Autonomous Community If the debtor defaults on repayment of the debt thecreditor can enforce its rights through summary proceedings During enforcement the creditor can askthe court to administer the assets1 Spanish secured creditors will not suffer any of the dilution of claimsrelated to the bankruptcy process if they avoid it and foreclose on the collateral instead This makes themortgage system a very attractive alternative insolvency institution In Spain bankruptcy procedurestakes much longer than foreclosures

Shares2 Pledge Must be notarized Permits the pledge of existing issued shares only Extension tofuture shares will require a pledge update Pledges are recorded in Shareholdersrsquo Book if shares arenominative The creditor can also ask the Court for the property to be sold to recover the debt

Receivables and contractual rights Pledge Must be notarized Written notice to the third party debtoris advisable but not a requirement for perfection of the pledge Trade creditors can use credit rights(garantiacuteas de creacutedito) to secure unpaid debts3

Bank accounts Pledge Must be notarized Written notice to the account holding bank is advisable butnot a requirement for perfection of the pledge

Plant and machinery Chattel mortgage Must be notarized and registered at the Chattel Mortgage andNon-Possessory Pledge Registry (Registro de Hipoteca mobiliaria y Prenda sin desplazamiento)Attracts stamp duty the amount of which varies by Autonomous Community

Intellectual property Chattel mortgage Must be notarized and registered at the registry of moveableproperty Attracts stamp duty the amount of which varies by Autonomous Community

Business goodwill No security can be granted Possibility for a Spanish company to grant upstreamguarantees

[1] See letter g) below

[2] Royal Decree Law 52005 of 11 March provides secured lenders with material enforcement advantages and insolvency protection

[3] Article 9016 of Spanish Insolvency Law amended by Law 382011 provides that those credits considered to be future credits will only be consideredprivileged in relation to an ordinary pledge guarantee when recorded in a public registry with a date prior to the declaration of insolvency


317

The transactions executed by the debtor during a two-year period prior to the initiation of insolvencyproceedings and that are detrimental to the debtorrsquos estate may be challenged and annulled even in theabsence of fraud

To make it possible to exercise the action to annul a disposal of an asset the Law presumes either byrebuttable presumption or ldquojuris et de jurerdquo presumption that the act in question is detrimentalGenerally speaking the burden of proof that an act is detrimental falls on the insolvency administratorsor receivers All donations and disposals between living persons free of charge and payments ofclaims falling due after the opening of the insolvency proceeding are presumed to be detrimentalacts without admission of evidence to the contrary Providing collateral for already existing debts andcarrying out business transactions with relatives for a consideration and in the case of a legal personwith the de facto and de jure director the main shareholders or the group companies are also presumedto be detrimental acts but in this case evidence to the contrary is admitted

An action to annul an act or transaction is compatible with other actions for reimbursement (invalidityannulment termination on grounds of fraud by creditors etc ndashacciones de reintegracioacutenmdash) All thesemust be heard by the insolvency Court at an incidental hearing The incidental insolvency proceedingincludes a phase for written submissions (application and reply) and a hearing to examine the evidenceproposed and declared to be relevant after which the judge hands down a judgment This incidentalproceeding which is held concurrently with the insolvency proceeding is used to resolve anydeclaratory lawsuit as part of the insolvency proceeding

Moreover it must be highlighted that amongst other cases the Spanish Insolvency Law 2003 providesthat the insolvency will be determined in any case as being lsquoguiltyrsquo if he debtorrsquos assets arefraudulently transferred out from the debtorrsquos estate during the two years prior to the declaration ofinsolvency

The general effect of the claw-back is the annulment and simultaneous restitution of whatever they mayhave already received from the other

Refinancing agreements by which there is generally at least a significant increase of credit oramendment of its obligations either through the extension of its maturity either through the establishmentof other obligations in lieu thereof (the ldquoRefinancing Agreementrdquo4 ) are not subject to claw back(neither such Refinancing Agreement nor agreements payments or security or guarantees arising fromthe said Refinancing Agreements are impeachable) provided that certain conditions are met


Directors may face the following liabilities if they do not file or file late for insolvency proceedings(Voluntary Insolvency) or a third party files a Necessary Insolvency with the Court as explained insections below

(i) In the event of insolvency proceedings ending in liquidation directors can be sanctioned to pay theamount of credits that remain unpaid after the liquidation of the debtor5

(ii) It is also possible that at any stage the judge may order the seizure of goods owned by directors(including shadow and de facto directors during the above referred period of time of two years) when itis foreseeable that the insolvency will be declared as lsquoguiltyrsquo and that there will not be enough assets topay all debts

(iii) Notwithstanding the above directors may also face criminal as well as corporate law liabilityand in particular regarding the latter the most important case in this respect is the mandatory dissolution

318

of the company imposed upon the directors by corporate law if the companyrsquos net worth falls below halfof its share capital (capital impairment situation)

Generally speaking directorsrsquo liability is very strict and this is taken in consideration in the insolvencyproceedings6 When directors have not run the company properly or have not filed for insolvency withinthe term set by law they risk being declared liable for the companys debts

[4 ]Royal Decree-Law 42014 of 7 March establishes new mechanisms aimed at encouraging Refinancing Agreements

[5 ]Without prejudice of derivate or subsidiary actions complaints in cases of fraud criminal offences etc lodged against directors if no insolvencyproceeding has been filed

[6 ]Also note that Royal Decree-Law 42014 of 7 March establishes a presumption of willful misconduct and gross negligence in relation to the rating of theinsolvency situation as guilty when the debtor or if applicable its legal representatives directors or liquidators have refused to carry out the capitalization ofthe credits (or issuance of securities or convertible instruments) without reasonable cause frustrating the efforts for a Refinancing Agreement

2 Taking action


1 The directors of a company have an obligation to file for insolvency (ie debtorrsquos requestedinsolvency the ldquoVoluntary Insolvencyrdquo) within two months from the date they become aware or shouldhave become aware of the insolvency situation

2 The general obligation to file for Voluntary Insolvency does not apply if the debtor notifies the Courtthat it has initiated negotiations with its creditors to obtain lock-ups to an anticipated compositionagreement or to negotiate an out-of-court Refinancing Agreement (the so-called 5bis communication orPre-Insolvency Communication) In such case the debtor will gain an additional three month periodto achieve an agreement with its creditors and one further month to file for insolvency In additioncreditorsrsquo applications to file for Necessary Insolvency during that period will not be accepted

In any case it is advisable to submit a statement with the Court notifying the commencement ofnegotiations with creditors no proof needs to be provided in this respect but may protect the companyandor its directors from liabilities in case the company requires requesting insolvency proceedingsafter a four-month period (pre-insolvency phase) has elapsed Only one Pre-Insolvency Communicationmay be served per year If the debtor does not reach any agreement an insolvency petition must be filedwith the Court

3 On a separate point Law 142013 to support entrepreneurs and their internationalization published inSpainrsquos Official State Gazette on 28 September 2013 (hereinafter the ldquoEntrepreneurs Lawrdquo) establishesschemes outside the insolvency proceeding between some types of debtors and their creditors under ascheme called ldquoout-of-court payments agreementrdquo approved by a new body an Insolvency Mediator

Entrepreneurs Law has added a new Title X to the Insolvency Law dealing with the out-of-courtpayments agreement a mechanism designed to secure out of court negotiation of a payments plan withcreditors as an alternative to the insolvency proceeding and to the formal Refinancing Agreementsubject to compliance of certain criteria and thresholds

a) an entrepreneur (an individual) in a position of current or imminent technical insolvency withliabilities below EUR5 million and

319

b) a legal entity in a position of technical insolvency with fewer than 50 creditors and assets orliabilities below EUR5 million provided that in both cases the costs of the agreement can be metand the projected assets and revenues will be sufficient to allow a viable agreement The majorityneeded to approve the payments plan is 60 of the total liabilities or 75 if it includes assetsgiven in payment (in this latter case it must have the approval of the creditors with securityinterests in the assets given in payment) Only the creditors affected by the payments plan will becomputed to determine the quorum

The consecutive insolvency proceeding (concurso consecutivo) takes place following a petition for aninsolvency order by the debtor or by the creditors where they can prove that they were unable to reachan out of court payments agreement or if such an agreement has not been fulfilled or has been cancelledIn an insolvency proceeding of that type the liquidation phase will commence simultaneously If thedebtor in the concurso consecutivo is an individual and the proceeding is judged to be non guilty thejudge will decide on the remission (or cancellation) of any debts that were not paid in the liquidation ofassets during the insolvency proceeding except for public law debts provided all the post-insolvencyorder claims and preferred claims have been satisfied in full This is the so-called ldquofresh startrdquo whichhas made its first appearance in Spanish law although with restricted effects

4 Any creditor is entitled to file for the debtorrsquos insolvency (ie a creditorrsquos requested insolvency theldquoNecessary Insolvencyrdquo) basing its claim on the insufficiency of attachable assets when enforcing itscredits against the debtor or otherwise by providing evidence of any of the following facts

(i) general default of the debtorrsquos payment obligations

(ii) general seizure of the debtorrsquos assets

(iii) sale of the debtorrsquos assets at a loss or in a negligent manner (or being put beyond creditorrsquos reach)

(iv) the debtorrsquos failure to pay during the three-month period preceding the filing for NecessaryInsolvency its tax liabilities social security obligations or salary and other monetary employmentobligations


Normally the debtor will arrange out-of-court debt restructuring which involves changing thecomposition andor structure of assets and liabilities of debtors in financial difficulty without resortingto a full judicial intervention and with the objective of promoting efficiency restoring growth andminimizing the costs associated with the debtorrsquos financial difficulties

Restructuring activities can include measures that restructure the debtorrsquos business (operationalrestructuring) and measures that restructure the debtorrsquos finances (financial restructuring) Purelycontractual restructurings enhanced restructurings (purely contractual workouts that are enhancedby the existence of norms or other types of contractual or statutory arrangements) and hybrid procedures(procedures where the involvement of the judiciary or other authorities is an integral part of theprocedure but is less intensive than in formal insolvency proceedings) represent in numeroussituations an efficient alternative or a useful complement to purely formal insolvency proceedings


Private work outs are the most creditor-friendlydebtor friendly approach such as

(i) Informal contractual agreements with creditors as being flexible as opposed to the relativerigidity of the formal insolvency proceedings

320

(ii) Companies that sell major assets (or assign them on a ldquodatio in solutumrdquo purpose) with highliquidation value to satisfy the outstanding debts before closing the business

(iii) Royal Decree-Law 42014 of 7 March establishes three new mechanisms aimed at encouragingRefinancing Agreements before state of insolvency is declared by the Court7

[7]See Annex I to this Questionnaire


The Spanish Insolvency Law 2003 establishes a single insolvency procedure applicable to every debtorin insolvency (ldquoconcursordquo) and is subject to the following lsquoequity testrsquo the incapability of the debtor tocomply with its obligations regularly when they become due and payable (the ldquoCurrent Insolvencyrdquo)Additionally the debtor may also apply for insolvency if it foresees such situation in the imminent future(the ldquoImminent Insolvencyrdquo8)

As stated above a company must apply for insolvency within two months as from the date on which itbecomes aware or should have become aware that it is insolvent The Spanish Insolvency Law 2003sets out a series of situations in which the company is deemed to have knowledge of insolvency

The following circumstances presume that directors knew of the insolvency situation

i General default of payments

ii Attachments on the majority of the corporate assets

iii Removal or fire sale of assets

iv General default on any of the following obligations for three months taxes social security duessalaries

[8]Similar to Germanyrsquos lsquothreatening insolvencyrsquo(Drohende Zahlungsunfaumlhigkeit)


Spanish Insolvency Law 2003 created specialized Courts (Juzgados de lo Mercantil) specialized indealing with matters related to Commercial Law including insolvency Thus debtors and creditors asthe case may be must file for a petition of Voluntary or Necessary Insolvency proceedings respectivelyat the Juzgado de lo Mercantil (the ldquoCourtrdquo)

The insolvency proceeding commences with the filing of an insolvency request with the Juzgado de loMercantil of the capital of the province in which the debtor has its centre of main interest (COMI)9Certain documents must be accompanied with the said request which may vary depending on who thepetitioner is and if the insolvency is imminent or current

For legal entities COMI is the place where the debtorrsquos registered addresses is located The SpanishInsolvency Law 2003 also covers the insolvency of groups of companies Public bodies cannot bedeclared bankrupt There are also special provisions for insurance companies or banks that becomeinsolvent Insolvency applies to both natural and legal persons


321

The debtors can file an application for commencement of bankruptcy (Voluntary Insolvency) if it isunable to pay its debts as they become due (Current insolvency) or if it foresees that this will happen inthe near future (Imminent insolvency) as explained above

The creditors10 are also entitled by the law to file an application for commencement of NecessaryInsolvency in the cases provided under Spanish Insolvency Law 2003

[9 ]The European Court of Justice has clarified the rules on when a companyrsquos centre of main interest (ldquoCOMIrdquo) can be transferred from one member stateto another and what sort of activity is required in a member state for its courts to have jurisdiction to open secondary insolvency proceedings (Re Interedil Srl-in liquidation- Case C-306-09 20 October 2011)

[10] The law recognizes the creditor that initiated the proceeding by regarding a part of its credit ndash ie up to one fourth ndash as a privileged credit


The Court will be involved until the finalization of any of these two stages i) the settlement ofcreditors which aim is to reach an agreement between the debtor and the creditors for the payment ofthe credits (ldquoConveniordquo) or ii) the liquidation which aim is to liquidate the active bankruptcy estate inorder to pay the debts The liquidation stage will be initiated if no agreement is reached or in case ofnon-compliance by the debtor with the agreement


It is not easy to estimate how long insolvency proceedings will take but 15 to 24 months may be normal11 depending on the complexity of the case

[11] Median length of a bankruptcy process in 2007 ranged between 20 and 23 months Such figures mainly correspond to a pre-crisis situation The economiccrisis made the number of bankruptcy filings soar since 2008 implying a congestion of the courts and a dramatic increase in the median length of thebankruptcy process between 27 and 35 months in 2008 between 31 and 36 in 2009 and between 28 and 36 in 2010 (Van Hemmen 2009 2010 2011)


The declaration of insolvency must be published in the Official State Gazette (Boletiacuten Oficial delEstado) and must also be recorded at the Insolvency Public Registry (Registro Puacuteblico Concursal)

Any form of advertising deemed necessary for the notification of bankruptcy may also be used

All other declarations to be published by means of edicts shall be published in the Insolvency PublicRegistry and the Courtrsquos bulletin board

The Court declaration of insolvency together with all other bankruptcy resolutions other than Law whichmust be advertised shall be posted at the Insolvency Public Registry

The declaration shall also be entered in the Commercial Registry preferably by electronic means andin all other administrative records as necessary


The objective of insolvency proceeding12 is either to

(i) Restructure the companyrsquos debt in order to allow the debtor to continue operating The debtormakes an arrangement with creditors to reduce its debt over a certain period of time up to thelimitations set by the Spanish Insolvency Law 2003 or

322

(ii) Wind up or liquidate the company in order to sell the assets and repay all of the debt owed to thecreditors as much as possiblep or liquidate the company in order to sell the assets and repay all of thedebt owed to the creditors as much as possible

The company judicially declared insolvent will normally benefit from the following rights and duties

a) In a Voluntary Insolvency directors remain in their positions and the company continues managing itsassets (lsquodebtor-in-possessionrsquo) subject to the supervision of the Court appointed InsolvencyAdministrator(s) (administradores concursales) unless the court forces it to be treated in the same wayas a Necessary Insolvency in which case receivers take over the administration of the companys assets

b )Unless the company requests its liquidation its business does not usually cease upon the request ofinsolvency If the receivers are merely supervising they determine the activities and transactions that thecompany can continue to manage in the ordinary course of business If the receivers take over themanagement of the business they must take the necessary steps to ensure that its commercial activitiescontinue

c)During insolvency proceedings shareholders continue to function as usual but receivers can attendand have the right to be heard at their meetings The same applies for the board of directors meetings

d) Once the debtor has been declared insolvent the Spanish Insolvency Law 2003 sets forth differentclasses of creditors whose claims are given priority or preferential status However some minor butsignificant exceptions exist which affect the concept of equal and ratable distribution among allcreditors (par condition creditorum ndash pari passu) This is achieved by amending the status of somecreditorsrsquo claims - making them effectively pre-preferential For example under Spanish law claims ofan administrative and labor-related nature are not automatically suspended on the date of the declarationof the bankruptcy Creditors must submit proof of their claims within one month of the courts decision tocommence insolvency proceedings

e) Debts of ordinary creditors and subordinated creditors are not paid until the agreement isapproved

f) Any proceedings that a creditor may wish to bring against the insolvent company that could affect itsassets must be heard before the insolvency judge at the Court No arbitration proceedings can becommenced against the debtor If court andor arbitration proceedings have already begun they continueuntil the judgment or award becomes final and binding

g) No individual judicial or extra-judicial enforcement actions can be brought against the companysassets and actions that have already begun are stayed from the date of the declaration of insolvencyHowever there is an exception for creditors with a security interest in property over assets of thecompany that are used in its commercial activities these creditors can bring enforcement proceedingsfrom the date on which the composition agreement (ldquoConveniordquo) is approved or after one year of theinsolvency resolution if the liquidation has not begun

h) The companys debts cannot be set off against monies owed to it

i) No interest accrues other than interest on debts that have a legal guarantee (mortgages salaries)

j) The statute of limitation period for actions relating to debts that pre-date the insolvency is postponedduring insolvency proceedings

k) Contracts with mutual obligations that have not yet been performed remain in force although the

323

creditor can request termination of the contracts before the Court if the company defaults (Clausesallowing a contract to be terminated in cases of insolvency are null and void)

[12] This procedure affects both individuals and legal entities


If the company files for its own insolvency (Voluntary Insolvency) the Court (except in clear cases ofdeep economic distress or doubts about the credibility of the directorsrsquo behaviour) will leave the boardof directors or administrative body in control (similar to US Chapter 11 lsquoDebtor-in-possessionrsquo)throughout the entire procedure under the supervision of the Court appointed InsolvencyAdministrator(s) Moreover the company will not cease day-to-day trading unless it is evident that it isworthless as a going concern


Local red-flags are normally those pertaining substantive tests laid down by Spanish Insolvency Law2003 such as

(i) general default of the debtorrsquos payment obligations when they become due

(ii) general seizure of the debtorrsquos assets preventing creditors from exercising their securities

(iii) sale of the debtorrsquos assets at a loss or in a negligent manner (or put them beyond creditorrsquos reach)or

(iv) the debtorrsquos failure to pay (during the three-month period preceding the filing for Insolvency) its taxliabilities social security obligations or salary and other monetary employment obligations

(v) misuse of customer money before the company files for insolvency or questionable payments


There are no political factors involved aside from the effects or consequences that certain bailouts theSpanish Government will implement in Spain may cause on distressed companies not benefiting fromsate support since they will be treated in a different manner (The Spanish Insolvency Law 2003 doesnot provide any specific mechanism of state support)

3 Creditor issues


The court declaration of insolvency that starts the formal procedure determines an automatic stay in allunsecured credits until the end of the procedure and interest ceases to accrue with very limitedexceptions


Provided that insolvency proceedings have not begun [also see letter g) above] any creditor can bringthe following civil actions against the debtor

324

i Declarative ordinary proceedings (juicio declarativo ordinario) These are used to obtain an orderto make the debtor comply with a particular ruling or to seize the debtors assets for an amount sufficientto let the creditor recover the debt owed and claim for damages Court resolutions can be enforcedimmediately

ii Fast-track or monitory proceedings (proceso monitorio) These are fast-track proceedings thatallow the creditor to recover an unlimited amount provided the debt is stated in a document (egnormally an invoice)

iii Special proceedings for bills of exchange (juicio cambiario) This is an action used to recoverdebts that are covered by bills of exchange cheques or promissory notes

iv Special proceedings to execute unpaid pledges and mortgages (procedimiento de ejecucioacuten sobrebienes hipotecados o pignorados) This is a procedure used to enforce mortgages or pledges overassets or credits It can be started even if the debtor is involved in insolvency proceedings but receiversmay ask for a stay of a year if the affected property is used to carry out the business or activity of thecompany


Set-off will not apply during the insolvency proceedings as laid down in article 58 of SpanishInsolvency Law 2003 However set-offs will operate when their requirements existed prior to theinsolvency Court declaration This is regardless of the court or administrative decision acknowledgingthe set-off having been rendered after the insolvency Court declaration


Inter-company debt will be treated as a subordinated credit (as opposed to an ordinary credit) if certainlegal requirements are not met such as not entering the relevant loan agreement into the Contract Bookof the company

If the Refinancing Agreement12 affects a group of companies the percentage required to attain anagreement (60 of the debtorrsquos liabilities) must be calculated both on an individual basis by referenceto each group company and on a consolidated basis by reference to the claims of each group This 60of the debtorrsquos liabilities will not under any circumstances include intercompany loans

Special consideration must be made to creditors that have the status of a lsquoperson with a specialconnectionrsquo according to Article 932 (subordinated credits)

[13] See Annex 1 (article 71 bis1)


Creditors are entitled to file a petition for the declaration of insolvency of company affiliates if theybelong to the same group of companies as laid down by Law 382011 before cited


There is no ldquocreditor committeerdquo in Spanish Insolvency Law 2003 as such

Law 382011 aforementioned establish that legal entities can now be appointed receivers orinsolvency administrators and as a general rule one receiver (instead of three) will be appointed ineach insolvency proceeding by the court from different pools except in cases when the proceeding is

325

especially important (concursos de especial trascendencia) due to the number of creditors annualturnover employees etc (as set forth in article 27 bis of Spanish Insolvency Law 2003) in which casethe Court may appoint a creditor from the upper third part of credits in terms of amount

The receiver or insolvency administrator is a technical body appointed by the judge which reports toand works with the latter defends the interests of creditors and manages the equity of the debtor Itsduties involve the acts undertaken by the debtor in exercising hisher powers or replacing the debtorwhen heshe has been suspended in that year drawing up the report relating to the insolvencyproceedings to include the inventory of available assets the list of creditors and in its case theevaluation of the proposed agreement presented



The insolvency administrator(s) take over management when the Court so decides ndashmore commonly increditorsrsquo initiated procedures ie Necessary Insolvencymdash and in the remaining cases they overseecurrent management and have to authorize all transactions outside day-to-day business of the firm


Save incentives placed for fresh money in the context of a Refinancing Agreements (see Annex 1below) it is very difficult that debtor obtains finance from third parties after the insolvency proceedingsare requested at Court The company may have to rely on the soundness of its financials at the moment itenters the insolvency procedure and the capability of generating return from its ongoing business


Aside from out-of-court restructurings by introducing the privilege granted to new lending or lsquonewmoneyrsquo in the context of Refinancing Agreements the Spanish legislator has not yet included acomprehensive post-petition financing regulation within the Spanish insolvency legal frameworkTherefore the Spanish Insolvency Law 2003 still does not have a legal regime that provides incentivesfor post-petition financing and that facilitates debtorsrsquo access to liquidity through a streamlinedprocedure at the early stages of insolvency proceedings (such as the ldquodebtor-in-possessionrdquo ndashDIPmdashfinancing under the US Bankruptcy Code)


The procedure determines a stay both for unsecured and secured creditors with the exception ofemployees for certain amounts

Employeersquos salaries and wages are considered as creditors with general privileges (creacuteditos conprivilegio general) See section 5 below


As stated above contracts with mutual obligations that have not yet been performed remain in forcealthough the creditor can request termination of the contracts before the Court if the company defaults(Clauses allowing a contract to be terminated in cases of insolvency are null and void per article 61 ofSpanish Insolvency Law 2003)

326



The insolvency administrators or receivers must draw up a list of creditors in which the claims on thedebtor are recognized and ranked within two months of the opening of the insolvency proceeding Priorto this the creditors must lodge their claims within the month following publication of the openingof the insolvency proceeding They must do so by sending a signed letter to the administratorstogether with the invoice or other document providing evidence of the claim If the creditor fails tolodge his claim within the specified period it may be demoted from its original classification andclassified as subordinated debt Communication of credits may be made by electronic means


As stated above the creditors must lodge their claims within the month following publication of theopening of the insolvency proceeding

The administrators (receivers) must consider not only the claims lodged but also any claims which cameto their knowledge during their examination of the debtorrsquos accounts Claims recognized by judgments oradministrative certificates cannot be disputed although their classification may be challenged


Per Spanish Insolvency Law 2003 creditorsrsquo claims are ranked in the following categories (privilegedordinary and subordinated)

1 Privileged creditors (creacuteditos privilegiados) These creditors are divided into two subcategories

Creditors with special privileges (creacuteditos con privilegio especial)

I construction or repair creditors (creacuteditos refaccionarios)

II creditors with rights in property (limited to the secured amount)

III creditors under financial lease agreements or sale and purchase agreements where the debtorrepays the debt in installments

IV creditors with interests in book-entry securities

V creditors to whom property has been transferred

Creditors with general privileges (creacuteditos con privilegio general)

I employees owed wages who do not have special privileges

II employees with indemnities arising from the termination of employment contracts workplaceaccidents and professional illnesses as well as debts owed for breaches of occupational healthand safety obligations (if accrued before the declaration of insolvency)

III employees owed amounts relating to tax and social security withholdings

327

IV contractors and authors of intellectual property works who have assigned exploitation rights intheir work in return for payment if accrued in the six months before declaration of insolvency

V employees with up to 50 of the amounts owing on tax and social security claims as well as anyother public debts if they do not enjoy any other preferential treatment

VI claims for non-contractual civil liability

VII creditors with up to 50 of the debt owed who petitioned for the insolvency of the debtorprovided the relevant debt owed is not subordinated

2 Ordinary creditors (creacuteditos ordinarios) Creditors with debts that cannot be classed as privilegedor subordinated are ordinary debts

3 Subordinated creditors (creacuteditos subordinados) Creditors with debts which are consideredsubordinated debts namely

I credits reported late or inappropriately

II treated as subordinated as a result of a contractual agreement such as participative orsubordinated loans

III relating to an interest of any kind except those arising from rights in property up to the limitstated in the guarantee

IV owed to shareholders holding at least 5 (for companies listed on a recognized stockexchange) or 10 (for unlisted companies) of the companys share capital or by any person relatedto the creditor (art 93 Spanish Insolvency Law 2003)

V relating to any claim made in bad faith

4 Credits against the insolvency estate (creacuteditos contra la masa) Credits different from the formerthat arise after the declaration of insolvency and must be paid on maturity

I credits for salaries for the last 30 days accrued before the declaration of insolvency on amountnot exceeding twice the minimum wage (EUR64530 per month)14

II legal costs and necessary expenses for the application and declaration of insolvency and theassistance and representation of the insolvent and the administrator throughout the proceeding

III alimony of the debtor and the people to whom he had a legal duty to provide it

IV credits generated by the practice of professional or business activity of the debtor after thedeclaration of insolvency including wage debts severance pay and termination of employmentcontacts

V 50 of the credits involving new cash revenue granted under a refinancing agreement (freshmoney)


The Spanish Insolvency Law 2003 does not provide for any other method for claims filing Complexity

328

issues may arise in claims stemming from foreign concurrent proceedings relating to the same group ofcompanies in which case receivers in Spanish insolvency proceedings must co-operate with receiversin the foreign proceedings

[14]The last 30 days wages owed to employees have priority over any other debt owed including those relating to mortgages or any other creditors with rightsin property



As from March 2014 cram-down is no longer based on the type of creditor (financial institutions) buton the type of liability (financial liabilities which pursuant to Spanish Accountancy regulations arealmost all liabilities subject to a term) The result of this change is a significant increase in the scope ofcreditors that may be affected by a cram-down Liabilities derived from commercial relationships (iedebts of suppliers) and public-law credits are expressly excluded

The majority threshold to approve an agreement is lowered from 55 to 51 without counting theldquopersons having a special relationship with the debtorrdquo to form such majority Notwithstandingachieving such majority will protect the agreement against a possible claw-back action and grantpreferential ranking to the fresh money injected but will not grant the agreement the cram-down effectvis-agrave-vis opposing creditors Specific majorities are required depending on the content of the agreementfor such purpose (see Annex 1 below)


As regards the insolvency procedure once a creditorsrsquo agreement proposal (ldquoconveniordquo) has beentotally performed and term to file any non-compliance petition of two months has elapsed oralternatively all assets have been distributed to creditors the Court will render a resolution decidingon the termination of the insolvency procedure

If neither the debtor nor a creditor proposes a composition agreement or if no proposal is approved bythe required majority at the creditorsrsquo meeting or by the court the court will declare the liquidation ofthe debtor formally concluding the insolvency proceedings

If the debtor breaches the terms of the Refinancing Agreement or the creditorrsquos agreement proposal anycreditor may apply to the Court for the declaration of non-compliance If the Court declares the non-compliance either the

Refinancing Agreement or the creditorrsquos agreement proposal will be rescinded and creditors may file apetition for insolvency or start enforcement proceedings


We understand the cram-down described above will have little relevance in practice because it cannotbe applied to secured creditors which is usually the case with all financial creditors



329

See section 2 above


Pre-packed sales (similar sales regulated under UK law) may be considered within insolvencyproceedings (whether or not within the liquidation phase) as they are probably the most effective way tomaximize the debtorrsquos assets proceeds of sale However the Spanish Insolvency Law 2003 remainsunclear in particular as to whether the subrogation of Social Security claims is mandatory or not Therehave been contradictory court rulings in this regard and the consequences may be quite material



Regulation (EC) 13462000 on insolvency proceedings (Insolvency Regulation) applies in SpainSpain is also party to the United Nations Commission on International Trade Law (UNCITRAL) ModelLaw on Cross-Border Insolvency 1997 and the Insolvency Act incorporates this


The declaration of insolvency must without further formalities produce the same effects in any othermember state that would apply under the law of the state where the proceedings began (article 17Insolvency Regulation) This means that court decisions in one member state concerning the openingconduct and closure of insolvency proceedings must be immediately and automatically recognized by allother member states

However the Insolvency Act requires foreign judgments to comply with certain formalities (under theexequatur procedure) before they can be recognized (article 220 Spanish Insolvency Law -Reconocimiento de la resolucioacuten de apertura-) including that the

(i) Insolvency has been declared by a foreign court

(ii) Foreign courts decision is final and binding

(iii) Decision is adopted by the court where the debtors COMI is located

(iv) Decision is not illegal under Spanish law

Generally Spanish courts are required to apply reciprocity when recognizing foreign insolvencydecisions

330

Switzerland

David Kaumlnzig Partner Markus Alder Partner Thouvenin rechtsanwaumllte

wwwthouvenincom email dkaenzigthouvenincom malderthouvenincom tel +41 44 421 45 45



A creditor may take security over certain movable (tangible) assets by taking possession of such assets(pledge) Unlike other jurisdictions there is no floating charge (non possessory charge) over tangibleassets in Switzerland There is no register for security interests in Switzerland other than for charges onreal estate registered in the land register purchase money security interest (goods sold under a retentionof title) air crafts and vessels

Tangible assets may be transferred to the creditor also by way of title transfer (unlimited right in rem) inwhich case the creditor is under a contractual obligation to retransfer the assets (fiduciary transfer) orequivalent assets in the case of fungibles (pignus irregulare) back to the debtor upon satisfaction of thesecured obligation In both cases it is of paramount importance for the perfection of the pledge or titletransfer that the debtor no longer retains control over the assets and that effective possession istransferred to the secured party or its agent

The debtor may also assign all or certain of its receivables (existing and future) or other rights(intellectual property rights) as a security (limited right in rem) or by way of a full transfer (titletransfer) In the case of a full transfer of title the creditor is under a contractual obligation to reassign thereceivables or other rights back to the debtor upon full satisfaction of the secured obligation

Special methods for creating a security interest exist for securities held with an intermediary In thesecases a non possessory security interest of part or all of the securities held with a particular financialintermediary is also permitted under Swiss law


In General

Conveyances by the debtor prior to the declaration of insolvency which lead to reduction of the debtorsassets may be challenged according to Art 285 to 292 Swiss Debt Collection and Bankruptcy Act

Such action must relate to a period during which it is suspected that the debtor already knew or shouldhave known that such acts will prejudice other creditors or result in an undue preference This period(suspect period) is one year prior to the opening of bankruptcy or approval of a bankruptcyreorganization In case of fraudulent transfers the period is five years

Actions for avoidance must be brought within a period of two years from the day of the certificate ofdefault in the case of special execution the date of insolvency declaration or confirmation of thecomposition plan with assignment of assets Under the revised act the statute of limitation can beinterrupted andor waived

331

Conveyances and transactions during a moratorium are immune from such challenges provided they havebeen ratified by the court or creditors committee

The law distinguishes between the following transactions

Gifts

Gifts may be challenged during the one year suspect period irrespective of whether the creditor was atthe time the gift was made already overindebted

Transactions when company is overindebted

In case of over indebtedness of the creditor the law distinguishes between bull Collateralization of pre-existing debt which the debtor was not required to provide bull Satisfaction of a monetary claim byunusual means and bull Satisfaction of a claim which has not matured

Such acts may be challenged during the suspect period In addition the debtor must have beenoverindebted at the time of such actions The creditor may defend itself by proving that at the time of theaction it was not aware nor should it have known of the financial difficulties of the debtor

Fraudulent conveyances

All acts undertaken by the debtor which the creditor knew or should have known would prej-udiceother creditors may be challenged In the case of a related party transaction (which includestransactions between affiliated companies) the defendant must prove that it could not have known of thedebtors intent to act to detriment of other creditors

Effect of successful avoidance actions

A successful challenge of the above transfers will lead to the avoidance of the transaction to the extentrequired to satisfy the other creditors In case of a successful challenge the favored creditor will haveto return to the extent available the benefits received If the creditor has provided a benefit to thedebtor he is entitled to a reimbursement of such benefit to the extent the estate is still enriched

The same proceedings apply to special regulated entities such as banks insurance compa-nies andbroker dealers

Avoidable actions if successfully challenged will generally only lead to an obligation for resti-tution inmoney ie the transfer of the assets as such to the creditor is not reversed in rem


Where the companys most recent balance sheet shows that the companys assets do not cover itsliabilities (balance sheet test) or the company is not able to pay its debts as they fall due (liquidity test)the board of directors is under an obligation to call an extraordinary shareholders meeting and to comeforward with a restructuring proposal

In case no restructuring can be achieved the board is under an obligation to notify the bank-ruptcy judgeFailure to do so may lead to personal liability of the members of the board of directors for any damagecaused to the creditors as a consequence of the delay in filing for insolvency

Usually a period of 1 - 3 months must be granted to the board of directors and the board is well advisedto meticulously document its efforts to save the company from insolvency In the case of insolvency the

332

directors liability claim is an asset of the insolvency estate Only to the extent the estate does not pursuesuch action may a creditor request the insolvency estate to authorize the creditor to bring the directorsliability claim at its own costs and risk The proceeds if any derived therefrom will be reserved in thefirst place for the creditor bringing the action Any surplus falls into the estate

2 Taking action


Where the company is insolvent on a balance sheet or liquidity test the board of directors is under anobligation to inform the bankruptcy judge Such action may also be taken by the companys auditors

In its filing the company may motion for outright bankruptcy apply for a provisional morato-rium makean application for a maturity postponement or apply for a bankruptcy postpone-ment

The effect of the provisional moratorium basically is that bankruptcy proceedings may not be initiatedand that the statute of limitations are tolled to the exception of privileged claims and claims secured by apledge on real estate Further the effect of the provisional moratorium is that interest stops to accrue onall unsecured claims upon the granting of the provisional moratorium The period of the provisionalmoratorium is usually used to prepare a composi-tion plan In rare circumstances the court may deferfrom designating a provisional trustee Under the revised act upon application of the debtor the grantingof the provisional morato-rium must not be published If the provisional moratorium is not published thecourt must to designate a provisional trustee This change introduced with the most recent revision of theact namely that the provisional moratorium must not be published is designed to permit an applicant torestructure its balance sheet and negotiate with the creditors without the pressure of the publicity of alooming insolvency The granting of the provisional moratorium and the designation of a provisionaltrustee cannot be appealed

After the expiration of the provisional moratorium and if the Debt Restructuring Judge is of the view thata composition plan or reorganization of the company is likely to be achieved a definite moratorium canbe granted for an additional period of four to six months and the Debt Restructuring Judge will designatethe trustee and if found adequate a creditors committee may be established Upon request of the trusteethe moratorium may be extended to 12 or a maximum of 24 months The decision on the moratorium maybe appealed In the case of a rejection of the moratorium an appeal has no suspensive effect

The granting of the moratorium will be published

During the moratorium the debtor may continue its business activities under the auspices of the trusteeThe Debt Restructuring Judge may however order that certain actions require the consent of the trusteeor authorize the trustee to take over the management instead of the distressed debtor

During the period of the moratorium without the consent of the Debt Restructuring Judge the debtor maynot validly transfer and sell its assets grant securities or guarantees or make transactions withoutconsideration

During the moratorium the trustee will have to supervise the business activities and to draw up aninventory In addition the trustee will request the creditors by way of publication to lodge their claimswith the debtor Upon preparation of the composition plan the trustee will call a creditors meeting Atsuch creditors meeting the trustee reports upon the financial condition of the company and submits thedraft composition plan for approval in writing

333


The company may seek to come to a private debt arrangement These private arrangements can include adebt waiver maturity postponement or a debt equity swap with the goal to restructure the companysbalance sheet such that the company is no longer insolvent In a private debt arrangement there is nopossibility to force a creditor to reduce its obligations against the company Such private debtarrangement however is possible only before the declaration of insolvency Upon insolvency a privatedebt arrangement will be replaced by a composition plan Given that under the revised act a moratoriummust not be published a private debt arrangement may also be negotiated under the provisionalmoratorium


There is no general answer to this question since this depends upon the type of insolvency situation(over indebtedness vs liquidity) and the prospects of the company to continue all or part of its businessWhere the Company has a liquidity squeeze a moratorium may be the best alternative permitting theCompany to seek new capital or liquidate certain of its assets under the protection of the moratorium

Usually a composition plan (Nachlassvertrag) gives the administrator and the creditors committeemore flexibility in the winding down of the operations and the liquidation of the assets and therefore thechances to increase the proceeds available for satisfaction of the insolvency creditors are usually betterthan in the case of bankruptcy where the operations are shut down and all assets liquidated


Insolvency is triggered by over indebtedness (balance sheet test) or the inability of the com-pany tofulfill its obligations as they fall due (liquidity test) Insolvency is declared by the court uponapplication of the company the auditors or a creditor


Insolvency proceedings are usually initiated by the companys board by filing an application with theinsolvency judge The insolvency filing must be accompanied by a (audited) balance sheet on a goingconcern and liquidation basis where the company is subject to an audit


In addition to the board an insolvency filing can also be initiated by the companys auditors as well asby a creditor without having to pursue a preliminary debt collection proceeding where the company hasadmitted that it is unable to pay its debts as they fall due

A creditor whose claim has remained unsatisfied after the filing of payment summons against thecompany (Schuldbetreibung) may request opening of insolvency by requesting a continuance if thecreditors objection - if any - has been finally set aside by the competent court Please note that asecured creditor may not request continuance by way of bankruptcy but only by way of special executionof the collateral

Only for the uncovered portion may a secured creditor apply for insolvency continuation It is thereforerecommend excluding in security contracts the right of the debtor to first request special execution of thecollateral (waiver of the beneficium excusionis realis)


The court (in case of regulated financial institutions the Swiss Financial Market Supervisory Authority

334

(FINMA)) is in charge of declaring the company insolvent or to grant a moratorium The insolvencyoffice then proceeds with the necessary protective measures to secure the companys assets requests thecreditors to file their claims and invites them to the first creditors meeting

At the first creditors meeting the creditors will be able to designate an alternative administrator toreplace the bankruptcy office which is usually done in larger and complex cases Also the creditors mayelect the members of the creditors committee and allocate the powers between the administrator and thecreditors committee

Upon request either the distressed debtor or a creditor may petition the bankruptcy court for the grantingof a provisional moratorium The debtors petition must contain an updated balance sheet profit and lossstatement liquidity planning or comparable documents permitting an assessment of the applicantscurrent and future financial situation and revenue as well as provisional restructuring plan

Upon receipt of the petition the Debt Restructuring Judge will take such actions as necessary toconserve the assets of the distressed debtor grant a provisional moratorium and appoint a provisionaltrustee who assesses the financial situation of the debtor and the prospects of a reorganization orcomposition

The provisional moratorium may be extended to a maximum of four months Where it is obvious that norestructuring will be possible the restructuring judge will declare bankruptcy Should it becomeapparent during the provisional moratorium that a restructuring of the company or a composition planmay be achieved the restructuring judge will grant a definitive moratorium A careful preparation of thefiling and the verification of the figures presented are of utmost importance for a successful application

A composition plan is approved if a majority of the creditors representing at least 23 of the outstandingclaims or 14 of the creditors representing at least 34 of the outstanding claims consent to thereorganization plan The composition plan will further have to be approved by the bankruptcy judgeThe decision of the Debt Restructuring Judge may be appealed within 10 days from its decision Suchdecision may be further appealed to the Swiss Federal Supreme Court If no appeal has been filed andthe decision of the Debt Restructuring Judge regarding approval of the composition plan has becomevalid and enforceable the composition plan and the transaction set forth therein may be consummated

In case the composition plan is rejected by the creditors or not accepted by the bankruptcy judge anycreditor may request the immediate opening of bankruptcy proceedings


The insolvency proceeding can take anywhere from one to several years depending upon how complexthe situation is For instance the Swissair insolvency which commenced in 2001 is still not fully settledClaims filed by the insolvency estate or against the insolvency estate may take several years and maytherefore prevent the termination of the insolvency for over a decade

In these cases it is customary provided the financial situation permits this to make payments on accountto the creditors whose claims have been finally accepted The authorization to provide for such interimpayments lies with the creditors committee


The declaration of the insolvency will be published in the Swiss Commercial Gazette and the creditorswill be invited to file their claims with the competent insolvency office within one month of thepublication Third parties as well as creditors having assets belonging to the insolvent party arerequested to transfer such assets to the insolvency estate failing which they might be subject to criminal

335

prosecution Debtors of the insolvent party will also be required to notify the insolvency estate withinthe same period


Upon declaration of the insolvency the company looses its ability to dispose over its assets Interestceases to accrue except to the extent interest is secured by collateral Debt collection proceedings arestayed This applies in principle also to a moratorium


The concept of debtor in possession applies in the case the opening of insolvency is postponed by thejudge in the case of an application by the debtor based upon Art 725a Swiss Code of Obligations aswell as the moratorium The debtor as well as a creditor may motion for a bankruptcy postponement ormoratorium in case there is a substantial likelihood that the company can be restructured The insolvencyjudge may designate an administrator who supervises the board of directors and limits the authority ofthe board of directors or makes such authority subject to the administrators consent The judge willdetermine the obligations of the administrator A bankruptcy postponement as well as the provisionalmoratorium will be published only if this is necessary for the protection of third parties Whether or nota publication will be necessary depends largely on the cash flow generated Where the cash-flow issufficient to cover the ongoing costs of the company running under the moratorium then arguably thirdparty creditors will not be prejudiced by a moratorium or bankruptcy postponement


The designation of a creditors committee is crucial in larger insolvency or restructuring pro-ceedings Itis therefore advised to consult with likely minded co-creditors in advance of the first creditors meetingin order to secure a place on the creditors committee Also the selec-tion of the external insolvencyadministrator can be crucial Again we recommend to select the external insolvency administratorcarefully together with the other like minded creditors and to secure their consent Please note that it isnot permitted to buy the votes of other creditors or to offer them other benefits in order to secure theirvotes for the designation of the insolvency administrator or the representation on the creditorscommittee


Although there is no nationality requirement for the election to the creditors committee it isrecommended to designate a Swiss resident person as a member with expertise in corporate contractlitigation andor insolvency law matters

3 Creditor issues


Unsecured creditors are reduced to the right to receive their respective share in the insolvencyproceeds With the insolvency declaration and the publication of a moratorium collection and debtenforcement proceedings are stayed and interest stops to accrue unless the composition plan willprovide otherwise


336

In bankruptcy proceedings the entire estate of the debtor no matter where the assets are located will beliquidated and the proceeds distributed amongst all creditors in accordance with their privileges1

Upon the opening of bankruptcy proceedings all attachable assets owned by the bankrupt at the time ofthe opening of such bankruptcy proceedings will form irrespective of their location one single estateAssets which accrue to the debtor during the bankruptcy proceedings will also form part of such estate

The opening of bankruptcy proceedings stays all enforcement proceedings against the debt-or includingthose for the foreclosure on collateral provided by the debtor and no new enforcement proceedingsrelating to claims which arose prior to the opening of bankruptcy will be permitted The incomereceived by an individual from a gainful activity after the opening of private bankruptcy and assets in thepossession of the bankrupt belonging to third parties do not form part of the bankrupts estate Thirdparties may request the segregation of their property from the bankrupts estate

In addition where the bankrupt has acted as agent the principal has a right to request segregation ofthose tangibles which the agent has acquired in its own name but for the benefit of the principal (Art401 para 3 Swiss Code of Obligations) According to the prevailing opinion the principal may alsobased upon the same provision request segregation of the goods entrusted to the agent However in caseof banks such segregation is now explicitly provided for in Art 16 and 37 b of the Federal Banking Actin respect of tangible property and securities transferred by the banks customer to the bank

The bankruptcy estate will be liquidated by the administrator in bankruptcy and the proceeds from suchliquidation will be distributed among the creditors in accordance with their privileges (priority rights)

Please note that pursuant to Swiss law collateral pledged (limited right in rem as opposed to full titletransfer) by the debtor forms part of the bankruptcy estate and will be liquidated together with the otherassets even where the agreement with the secured party provides that the secured party may itselfproceed with the liquidation of such collateral (see BGE 116 III 26) However such creditor is entitledto receive the proceeds from the liquidation of such collateral up to the amount of its claim Anexception to this general principle applies to banks and security dealers regulated in Switzerland whomay liquidate the collateral even after the insolvency declaration

1 According to Art 39 Debt Enforcement and Bankruptcy Act the following individuals or entitiesregistered in the Commercial Register are subject to bankruptcy proceedings sole enterprise memberof a registered partnership unlimited liability partner of a limited partnership unlimited partner of acorporation with unlimited partners managing member of a limited liability company generalpartnership limited partnership stock corporation or corporation with unlimited partners limitedliability company cooperative foundation and association

2Please note however that the Swiss Federal Supreme Court has held differently in its decision 117 II492

3Art 37 b para 1 of the Federal Banking Act provides that the deposits set forth in Art 16 do not fallinto the bankruptcy estate but will be segregated in favor of the banks customer Similarly deposits ofthe bank with third parties are presumed to belong to the banks customer and will be segregatedaccordingly Deposits within the meaning of Art 37 b are

1Tangible property and securities of the deposit account holder

2Tangible property securities and claims to which the bank has fiduciary title for the account of theircustomer

337

3Unencumbered delivery rights of the bank against third parties from cash transactions forward andfutures transactions coverage transactions and from issues for the account of the banks customer (seeArt 16 Federal Banking Act) The administrator is either the local debt collection and bankruptcy officeor in more complex cases a specifically appointed liquidator usually an accounting firm or attorney


Set off is possible provided there is mutuality maturity and similarity The creation of mutuality postinsolvency will prevent a set off Hence triangular set off will unlikely be permitted in an insolvencysituation


Intercompany liabilities are treated like other liabilities in an insolvency situation Note Loans orsecurity interests granted by a Swiss company to its foreign direct or indirect parent or affiliate mayexpose the directors to personal liability Loans extended by a related party in financial difficulty maybe subject to equitable subordination in the case of insolvency


A piercing of the corporate veil requires elements pursuant to which the creditor in good faith waspermitted to rely upon a letter of comfort or other assurances or the affiliate against which recourse issought has permitted or has created the impression that it will be jointly liable Piercing of the corporateveil must be looked at in the context of the situation the issue did arise


A creditors committee will be established unless there is a summary insolvency proceeding The firstcreditors meeting in general determines the authority of the creditors committee The creditorscommittee has the following authority

(i) General surveillance of the office of the insolvency administrator

(ii) Review of questions submitted to the committee by the insolvency administrator

(iii) File appeal against decisions of the insolvency administrator

(iv) Decision as to the continuance of business operations unless the creditors has resolved thecontinuance

(v) Approval of obligations incurred by the estate (as opposed to pre insolvency filing obligations)

(vi) Decision on continuance or the commencement of legal actions

(vii) The granting of the authority to enter into a settlement agreement

(viii) 8 The first creditors meeting may further authorize the creditors committee to give instructions tothe administrator to dispose of the assets by way of private sale as op-posed to a public auction towaive claims of the estate subject to them being offered to a requesting creditor

(ix) Contest and challenge creditors claims filed

(x) Authorize interim payments on account for the creditors

338

(xi) Call further creditors meetings



Upon declaration of insolvency or moratorium the control over the company is in the hands of theinsolvency administrator or trustee and after the first creditors meeting in the hand of the creditorsmeeting


The estate is usually financed from its own assets and the proceeds derived there from Where thecompany continues its business under the auspices of a trustee new debts incurred by the company willbenefit from a super priority right


In case of an insolvency postponement or moratorium the company may seek financing from thirdparties Also in case of a composition plan the insolvency administrator may - with the approval of thecreditors committee - seek financing for the continuing operations of the estate Such financing willbenefit from a super priority right


Insolvency does not per se terminate the employment contracts However an employee may terminate theemployment agreement in case hisher salary is not paid or secured Claims of employees arising out ofemployment agreements for unpaid wages for the six month period prior to the declaration of bankruptcyand claims of employees arising out of the termination of employment agreements as a consequence ofbankruptcy have priority over unsecured third party claims


Acceleration and monetization of claims against the bankrupt party

In accordance with Art 208 Swiss Debt Collection and Bankruptcy Act upon the declaration ofbankruptcy all obligations of the debtor become automatically due (acceleration) with the exceptionof these obligations which are secured by a mortgage on real estate

Obligations which are not for the payment of a sum of money will be converted into an obligation for thepayment of money (monetization)

No automatic termination of contracts due to bankruptcy of one party

Under Swiss law bankruptcy of one contractual party does not in general lead to the termination of thecontract unless the contract provides so Thus absent an automatic termination clause the contract willhave to be terminated either in accordance with the provisions of the law or the contractual provisionsCreditors claims under contracts subject to a fixed term or terminable upon notice may only be made upto the time of expiry or the earliest possible termination date To the extent the estate makes use of theservices or delivery from such contracts during the insolvency the consideration owed for such deliveryor services forms part of the liability of the estate and thus benefit from a super priority

339

Cherry picking by bankruptcy trustee

However according to Art 211 para 2 Bankruptcy Act the administration in bankruptcy may at its solediscretion chose to fulfill any agreements entered into by the debtor In case of the assumption of thecontract by the trustee the other party can request the granting of adequate security

This right which in principle allows the administration in bankruptcy to fulfill only those con-tractswhich are advantageous to the debtor (cherry picking) has been recently abolished by an amendment tothe Bankruptcy Act (Art 211 para 2bis) for a certain type of transactions This amendment stipulatesthat where the agreements provide for delivery on a fixed term as well as for financial futures swapsand option agreements and where the contract value can be assessed according to market values thecounter-party as well as the administration in bankruptcy are entitled to terminate such agreements andclaim the difference between the agreed value of the contract and the market value at the time of thedeclaration of bankruptcy (close out and netting)



Claims must be filed with the insolvency office within one month from the publication of the insolvencyand the request to the creditors to file their claims In the case of regulated financial institutions claimson the book of the regulated financial institution are deemed filed Failing to file within the time limitprescribed does not lead to a forfeiture of the claim how-ever in case the insolvency office oradministrator has already published the creditors ledger the costs for republishing the creditors ledgermay be imposed upon the late filing creditor Also in the case of interim distributions the late filingcreditor will not benefit from these payments on account


One month from the publication of the request for filing in the Swiss Commercial Gazzette


Unsecured creditors are divided into the following priority classes

First priority class

Claims of employees arising out of employment agreements for unpaid wages for the six months periodprior to the declaration of bankruptcy and claims of employees arising out of the termination ofemployment agreements as a consequence of bankruptcy

Second priority class

Claims of children against their parents in connection with the administration of their assets

Third priority class

All other claims


340

In larger insolvencies the insolvency administrator will often prepare forms to be used by the creditorsfor the filing of their claims However there is no obligation to use these forms



In connection with a composition plan a unsecured creditor can be required (against his own will) toaccept only a partial satisfaction of its claims The composition plan is approved if a majority of thecreditors representing at least 23 of the outstanding claims or 14 of the creditors representing at least34 of the outstanding claims consent to the composition plan

The reorganization plan will further have to be approved by the bankruptcy judge The deci-sion of theDebt Restructuring Judge may be appealed within 10 days from its decision Such decision may befurther appealed to the Swiss Federal Supreme Court


Following the distribution the administration in bankruptcy submits its final report to the bank-ruptcyjudge in order to declare the bankruptcy proceedings closed The closing of the bankruptcy proceedingswill be publicly announced

Should - after the close of the bankruptcy proceedings - assets be discovered which belong to thebankrupt estate but which were not included therein the bankruptcy enforcement office takes possessionof them and without further formalities attends to realization and distribution of the proceeds to thecreditors who suffered a shortfall in their respective order


In general unsecured creditors can not expect more than 3 - 10 on the face amount of their claims



Private debt arrangements with the creditors


No unless the creditors can come forward with a pre-agreed restructuring proposal which howeverwill still need to be approved by the restructuring judge and the creditors A pre-packaged compositionplan may however greatly reduce the time of the moratorium and therefore accelerate the entireproceeding



341

Swiss insolvency laws apply to foreign entities provided such foreign entities have assets located inSwitzerland In case of bankruptcy of a debtor located outside of Switzerland the declaration ofbankruptcy of a foreign authority at the domicile of the debtor will be recog-nized in Switzerland inaccordance with Art 166 Swiss Private International Law Act provided the decree is enforceabledoes not violate Swiss ordre public and the country of origin of the decree applies the principle ofreciprocity A foreign insolvency administrator is not competent to file claims against a Swiss debtor orcollect assets located in Switzerland except where the foreign insolvency has been recognized inSwitzerland by way of a formal procedure and in which case it will be the Swiss insolvency office thatwill be competent for the collection of assets and the filing of claims (if any)

In case of recognition of the foreign bankruptcy decree the local insolvency authorities will proceed toa bankruptcy proceeding in relation to the assets located in Switzerland (Art 170 Swiss PrivateInternational Law Act) The Swiss bankruptcy authorities will establish a limited creditors plan whichcontains the secured claims and the non-secured claims of creditors domiciled in Switzerland

Conversely however an insolvency of a Swiss resident debtor company extends to all of its assetswherever located and the Swiss insolvency administrator is entitled to collect also the assets locatedoutside the Swiss jurisdiction Whether such a long arm authority of the Swiss insolvency administratorwill be recognized at the place where the assets are located will depend upon the law applicable wheresuch assets are located


(see above) Reciprocity is usually demonstrated to the court by providing a legal opinion from theSwiss Institute of Comparative Law as an independent expert

342

Tunisia

Sami Kallel Partner Kallel amp Associates

wwwkallelassociatestn email skallelkallelassociatescomtn tel + 216 71 280 017

While drafting our responses we relied upon the following legal texts

bull Law ndeg 95-34 of April 17th 1995 on Receivership of Enterprises in Financial difficulties assubsequently amended and completed respectively by Law ndeg99-63 of July 15th 1999 an by Law ndeg2003-79 of December 29th 2003 (ldquoLaw on Receivershiprdquo)

bull Code of Commercial Companies promulgated by Law ndeg2000-93 of November 3rd 2000 assubsequently amended and completed (ldquoCCCrdquo)

bull Code of Commerce promulgated by Law ndeg59-129 of October 5th 1959 as subsequently amended andcompleted

bull Code of Private International Law promulgated by Law ndeg98-97 of November 27th 1998

As a preliminary observation we draw your attention that any translation into English of any legalprovision should be understood as being an informal translation the Arabic version is the only officialand binding version



1 Before the beginning of insolvency proceeding

The Tunisian legislation into force for enterprises in economic difficulties did not provide for specialmeasures for creditors to take securities over assets The procedures for petition and enforcement doapply

2 If an insolvency proceeding is opened

(i) If an amicable settlement is opened

The claiming of assets for non payment of debts may be suspended If so debtors cannot take securityover assets during the proceedings


(ii) If a judiciary settlement is opened

The claiming of assets for non payment of debts is suspended during the period of observation Debtorscannot take security over assets during the proceedings

343


(iii) If a bankruptcy proceeding is opened

The claiming of assets for non payment of debts is suspended for the mass of creditors who cannot takesecurity over assets during the proceedings


1 In case of the opening of a judiciary settlement

As per Article 30 of Law on Receivership the Tribunal may invalidate the decisions of the enterprisesas were taken before the action is being brought before the Tribunal should these decisions beinconsistent with the receivership plan as well as with any act of transfer against payment or gratuitouswhich may affect the interests of the enterprise or any operation likely to favour one creditor overanother and any payment of a debt not due yet as long as those operations are entered into executionafter the date of the enterprise suspended payment

2 In case of bankruptcy

As per Article 462 of the Code of Commerce the following actions should be declared non binding onthe mass of creditors if they were made by the debtor either from the time adjudicated by the Tribunalas the date of the suspension of payment or 20 days before that date

minus free of charge acts or transfers except for small donations of use

minus advanced payments in whatever form they have been made

minus payments of over due pecuniary debts made other than in cash such as bills of exchange promissorynotes checks transfer order and in general any giving in payment except for rights acquired by thirdparties in good faith

minus The constitution of a mortgage by agreement or through judicial means or a pledge on the debtorsproperty to secure an existing debt


1 Civil liability

As per Article 121 and 214 of the CCC when the judicial settlement or the bankruptcy revealsinsufficient assets the Tribunal may upon request of the judicial administrator of the trustee of thebankruptcy or one of the creditors decide that the debts of the company will be supported in whole or inpart with or without solidarity and up to the amount designated by the Tribunal by the manager ormanagers or de facto manager The Tribunal may also prohibit in its decision the person convictedfrom managing companies or from performing commercial activities for a fixed period

The legal or de facto manager are exempt from the aforementioned liability should he proves that he hasbrought to the management of the company all the due care of a prudent entrepreneur and a loyal agent

In case of a bankruptcy and pursuant to the provisions of Article 213 of the CCC the Tribunal maysubject the President General Manager or the General Manager or the Deputy Director General to theforfeiture legally attached to bankruptcy However they may be exempted by the Tribunal if they prove

344

that the bankruptcy is not due to serious misconduct in the management of the company In the event ofincapacity of the President General Manager to exercise his functions the Deputy Director General orthe delegated administratordirector incur within the limits of the functions they performed the liabilitydefined in this Article in lieu of the President

By virtue of Article 596 of Commercial Code in case of the bankruptcy of a company the Tribunal mayextend bankruptcy to an person who under the cover of said company hided its own acts and performedin his personal interests commercial acts and disposed of the companyrsquos assets as if these assets werehis own property

2 Criminal liability

As per Article 29 of the Law on Receivership the Director liability may be raised once it is evidencedthat the latter committed embezzlements or any offences while managing the enterprise

2 Taking action


Two procedures are available for enterprises in financial difficulties

The first procedure is that made available before the enterprise suspends payment It consists of anamicable settlement whereby the Tribunal designates a conciliator between the enterprise and itsdebtors in order to get a settlement The settlement may consist on the staggering of debts their rebatethe stopping of the calculation of the interests or other measures

The second procedure is that made available to the company once it had suspended payment Theprocedure consists in the judiciary settlement


The Tunisian legislation into force on enterprises in economic difficulties does not distinguish betweenformal and informal procedures


Article 1 of the Law on Receivership provides amongst for the continuing of the activity of theenterprise and the reimbursement of its creditors Indeed the relevant provisions of the Law onReceivership and related regulation provide for measures which are as the case may be either to thebenefit of the creditors of the enterprise or to the debtor enterprise


The trigger for insolvency is the suspension of payment


The filing process is as follows

bull Regarding the amicable settlement the filing is made before the Commission for Monitoring theEconomic Enterprises

345

bull Regarding the judiciary settlement and according to Article 19 of the Law on Receivership the filingis made before the President of the Tribunal of First Instance having jurisdiction over the main headoffice of the enterprise

The aforementioned applications should be submitted together with the required documents andinformation otherwise the application should be rejected


The following persons are enabled to apply for placing the company into insolvency proceedings

bull The owner of the enterprise when it is an individual enterprise subject to the Law on Receivership

bull The President and General Manager or the General Manager or the majority of the Board of Directorswhen it is a joint stock company with a Board of Directors

bull The President of the Management Board the Sole General Director or the majority of the Board ofManagement when it is a joint stock company with Board of Management

bull The sole shareholder when it is a limited liability company

bull The manager when it is another company

bull Every creditor who could not recover his debt by way of individual enforcement means


The extent of the court involvement can be outlined as follows

1 Once the application is filed

The President of the Tribunal of First Instance after having requested the opinion of the Commission forMonitoring the Economic Enterprises may

(i) Order the triggering of the judiciary settlement and the opening of an observation period

(ii) Decide the rejection of the application

(iii) Order the sale of the enterprise to a third party without going through an observation period when itis clear that it is the only solution for the recovery the enterprise

2 During the process of the judiciary settlement

The Tribunal may notably

(i) Suspend the procedures of prosecution and enforcement

(ii) Oust the manager and replace him by a judicial administrator

(iii) Prohibit the manager from making any further operation of transfer or pledge on his stock or shareswithout authorization

(iv) Invalidate decisions of the manager of the enterprise which were taken before the action is broughtbefore the Tribunal

346

(v) Approve the receivership plan


There is no time limit imposed by the Law on Receivership It is treated on case-by-case basis


An extract of the Tribunalrsquos decision on the opening of the period of observance is recorded on theTrade Registry a copy is communicated to the Commission for Monitoring the Economic EnterprisesThe extract has to be inserted on the Official Gazette of the Republic of Tunisia to the diligence of theclerk of the Court

The Tribunalrsquos decision on the opening of the judiciary settlement and its decision on the approval ofthe receivership as well as the judgment declaring the bankruptcy has to be recorded on the TradeRegistry A copy is communicated to the Commission for Monitoring the Economic Enterprises It ispublished on the Official Gazette of the Republic of Tunisia

The judicial administrator shall notify the labor inspection of any termination of employment contractsandor reduction of wages

The decision of transfer of the enterprise and the call for tenders is published in the Official Gazette ofthe Republic of Tunisia and by any other means decided by the supervisory judge


i Suspension of pursuits and acts of enforcement

As per article 32 of the Law on Receivership once the period of observance is opened individualpursuits and any acts of enforcement related to debts collection or any claiming of assets for nonpayment of debts are suspended Are equally suspended the rates of interests and damages and overduepayments Some exceptions though apply

ii Termination of contracts

The enterprise may request upon authorization of the judicial administrator the termination of ongoingcontracts executed with third parties clients suppliers should the latter not be necessary for its activity


Under Tunisian law and to the best of our knowledge we are not aware about any similar procedure


To the best of our knowledge we are not aware of any local law red-flags particularly relevant to asituation


We are not aware of any political factors which may come into play

3 Creditor issues

347


Unsecured creditors may be affected when the company funds and assets do not cover all the debts



During the observance period the claiming of assets resulting from the non payment of debts as well asthe enforcement proceedings are suspended


Secured creditors may continue enforcement of their security


Please note that set-off does not apply except for a secured creditors in bankruptcy procedure


The Law on Receivership does not provide for any special measures in such situation


As per Article 478 of the CCC bankruptcy or receivership proceedings opened against a companyaffiliated to a group of companies can be extended to one of its affiliated companies when their assetsare confused or in case of embezzlement or abuse in the use of the companyrsquos assets subject tobankruptcy or receivership proceedings or if it is established that the debtor company is fictive or whenthe affiliated company appear to be shareholders in that company



As per Article 25 of the Law on Receivership the supervisory judge fixes the list of creditors anddesignates among them one or more representatives in order to communicate to him the creditorsrsquoobservations


Creditors are regrouped into the mass of creditors




As per article 26 of the Law on Receivership the company is controlled by the judicial administrator

ii If bankruptcy declared

348

As per article 467 of the Code of Commerce the company is controlled by the supervisory judge


The judicial administrator elaborates a receivership plan which includes the means to be implementedfor developing the company including if necessary the re-spreading of the debts the rate of reduction ofthe principal of these debts or related interests

The judicial administrator may equally suggest to change the legal form of the company or to raise itscapital He necessarily requests the views of the Commission of Monitoring of Economic Companies forthe elaboration of the plan consults the creditor representatives while taking into consideration theopinion of creditors concerning the rebate of their debts


We are not aware of a similar procedure available for the enterprise in Tunisia


As per Articles 21 36 and 38 of the Law on Receivership if the recovery of the company needs thetermination of the labor contracts or the reduction of salaries and advantages the judicial administratorinforms the Labour Inspection and waits for fifteen days the result of the conciliation procedure beforetransferring the plan to the Commission of Monitoring Economic Companies and to the official receiver

The authorized termination of a labor contract under the receivership plan is considered to be justifiedby economic and technical reasons Concerned persons preserve all their relating rights


As per Article 35 of the Law on Receivership contracts binding the company are to be continuedHowever the judicial administrator or the debtor himself may request their termination from thesupervisory judge should they deem not be necessary for the companyrsquos activity



As per Article 25 of the Law on Receivership once designated the supervisory judge fixes the list ofcreditors Creditors have to make sure that their debts have been recorded within 30 days from the dateof publication in the Official Gazette of the Republic of Tunisia of the opening of judiciary settlement

No debt may be recorded after that deadline unless authorization of the Tribunal is obtained In allcases no debt may be recorded after one year Some exceptions apply


See above


In the light of the Law on Receivership we understand that the debtors are ranked during the judiciarysettlement as follows

349

1 Super privileged creditors ie employees legal expenses made for the common interest of thecreditors for the conservation and the achievement of the common pledge

2 Creditors with new debts of the company raised from the opening of the observance period and whichare necessary to the continuing of the activity of the company as well as the rent of assets andequipments object of lease contracts which procedure of petition and for enforcement for their recoverywere suspended and which its due date is prior to the opening of the period of observance

3 Secured creditors with debts arising prior to the opening of the observance period

4 Unsecured creditors with debts arising prior to the opening of the observance period


Apart from the foregoing we are not aware of any other method



The Code of Commerce Provisions do not provide for Cram-Down procedure


The alternatives are outlined as follows

1 Decision on the continuing of the companyrsquos activity Full execution of the receivership plan orjudgment on the waiving of the enforcement of the receivership plan as the latter can no longer beenforced

2 Decision on the transfer of the company to third party Distribution of the price to the creditors by thejudge in charge of the enforcement of the Tribunalrsquos decision

3 Decision of lease or management lease of the company Payment of creditors in accordance with thereceivership plan (if not the receivership procedure may be re-opened)

4 Decision of winding up of the company Radiation of the Company from the Trade Registry

5 Declaration of bankruptcy of the company Judgment on the closing of bankruptcy


See above



We are not aware of any non-formal procedures for restructuring

350


As per Article 19 of the Law the President of the Tribunal of First Instance may decide the assignmentof the enterprise without having recourse to the observance period if it is established that this is theunique solution for restructuring the enterprise



As per Article 8 of the Code of International Private Law Tunisian jurisdiction has exclusivecompetence with regard insolvency proceedings such as restructuring or bankruptcy proceedings


We are not aware of any special recognition of foreign proceedings regarding insolvency or bankruptcyproceedings

351

Taiwan

Sheng-Chi Teng (Ms) (co-ordinator) and and Mr Willy Wang Guo Ju Law Firm

wwwguojulawfirmcomtw email willywangguojulawfirmcomtw shengchitengguojulawfirmcomtw tel +886 2 2577 6123



A creditor may take security by mortgage or lien on debtorrsquos real estate or pledge on debtorrsquos personalproperty

Furthermore with regard to a creditorrsquos monetary claims or claims exchangeable for monetary claimsin the event of the creditorrsquos showing of the impossibility or extreme difficulty to satisfy the claims bycompulsory execution in the future that creditor may apply to the court for provisional attachment overthe debtorrsquos assets for purposes of securing the satisfaction of a compulsory execution


According to the Bankruptcy Law of the ROC (Taiwan) the bankruptcy trustee has the authority torevoke the following acts which the company has taken within 6 month prior to the declaration of theinsolvency

(i) assurance that was made within 6 months prior to the declaration of the insolvency or

(ii) settlement of an undue debt


The director shall take the joint liability with the company in bankruptcy

2 Taking action


When a company is in financial difficulties resulting in its incapability of paying off its debts a creditoror the persons stipulated under the Bankruptcy Law of the ROC (Taiwan) may file for bankruptcyapplication for the company


In the event of the loss incurred by a company aggregates to one half of its paid-in capital the board ofdirectors shall convene and make a report to a meeting of shareholders

In the event that a companyrsquos gross assets are less than its total debt and are insufficient to set off itsliabilities the board of directors shall file for bankruptcy application to the court

352


(i) The creditors of the company or the company itself can place the company into the bankruptcyproceedings when the company is incapable of paying off its debts

(ii) In the event that the court finds the company is incapable of paying off its debts during any othercivil proceedings or executing proceedings the court may declare the insolvency ex officio

(iii) In the event of the aggregate assets of a company is insufficient to satisfy its liabilities during theliquidation process the liquidators shall file an application for declaration of bankruptcy


The extent of court involvement is wide At the filing of bankruptcy application the court should do thenecessary investigation and decide whether or not to grant the bankruptcy application The court shouldmake its decision within 7 days upon its receipt of the application unless an extension of another 7 daysis made on account of investigation necessity If the court decides to grant the bankruptcy application itshould appoint a bankruptcy trustee simultaneously


It depends on the nature of each case and it is hard to calculate an average term Sometimes if all thebankruptcy estates are cash only and there is no dispute between the creditors it will be faster However if the creditor committee cannot make a resolution of the method or price to liquidate thebankruptcy estates or the creditors raise objections to the distribution of the bankruptcy estates and filean opposition to the court it will take several years for the process to conclude


The court should notify all the known creditors debtors people who possess the property of theinsolvent company and the registration authorities of the insolvent company or of that companyrsquosproperty


The company as debtor can refuse any unsecured creditors who do not follow the bankruptcy process toclaim their rights Furthermore only the estates of the bankrupt company as debtor would bedistributed by the creditors who have filed their claims during the bankruptcy proceedings

3 Creditor issues


Unsecured creditorsrsquo right will be regarded as the claims in bankruptcy if they lawfully file their claimsduring the bankruptcy proceedings In other words an unsecured creditor cannot claim its right unlessit follows the bankruptcy proceeding to do so The unsecured creditors can only receive distributionfrom the bankruptcy estates


A secured creditor may exercise its security by the general execution proceedings If the result of theexecution is not enough to satisfy its right the insufficient part will be regarded as a claim in bankruptcy

353

and the creditor can join the distribution in respect of that unsatisfied part


A creditor may apply set-off regardless of the types of the debts However a creditor may not applyset-off if the debt arises after the declaration of bankruptcy


A creditor committee can be called by the court ex officio or upon the bankruptcy trusteersquos andorsupervisorrsquos application The court should appoint a chairman to preside the creditor committee Thecreditor committee may elect a supervisor decide the management of the bankruptcy estates and decidewhether the company in insolvency should keep operating or be shut down



The bankruptcy trustee


In the event that the insolvent company also stops its business or suffers an operating losses or businesscontractions such company may lay off employees with prior notice The employees of such companywill be entitled to a top-priority right in receiving up to six (6) months arrear wage which are payableunder the labor contract The employees may file the arrear wages beyond six (6) months as the claimsin bankruptcy


The contracts entered into by the insolvent company shall be performed by the bankruptcy trustee or under the approval of bankruptcy trustee In the event that a supervisor has been elected by the creditorcommittee the performance shall be approved by the supervisor

Furthermore a contract or a commercial arrangement usually stipulates that one partyrsquos insolvency is areason for the other party to terminate that contract or commercial arrangement Therefore if a contractor a commercial arrangement is terminated because of one partyrsquos insolvency that contract orcommercial arrangement will cease being performed



The creditors who obtain unsecured right before the declaration of bankruptcy shall file their claims tothe bankruptcy trustee


The court will set the period for the filing of claims when it declares a companyrsquos bankruptcy Theperiod shall be no less than fifteen (15) days and no more than thirty (30) days from the date of

354

bankruptcy declaration


(1) First priority

The expenses and debts of bankruptcy estates enjoy the first priority to be distributed

The expenses of bankruptcy estates include

(i) the expense arising from managing liquidating and distributing the bankruptcy estates

(ii) the necessary litigation expense for all creditorsrsquo common benefit

(iii) the remuneration for the bankruptcy trustee

The debts of bankruptcy estates include debts which are

(i) arising from the bankruptcy trusteersquos act which related with the bankruptcy estates

(ii) arising from the performance of bilateral contracts entered into by the company in insolvency

(iii) arising from voluntary service for the bankruptcy estates and

(iv) arising from unjust enrichment of the bankruptcy estates

(2) Claims in bankruptcy inferior to the first priority

The claims with preference right on any property of the bankruptcy estates shall be distributed prior toother claims

(3) The claims below shall not be filed as claims in bankruptcy

(i) the interests arising after the declaration of bankruptcy

(ii) the expenses for joining the bankruptcy proceedings

(iii) the damage or penalty arising from any non-performance because of the declaration ofbankruptcy and

(iv) any penalties fines or imposition payment from the government



The bankruptcy trustee shall file a distribution report to the court after the distribution is completed The court shall make a ruling for concluding the process after it receives the said report However ifany estate is found after the distribution plan is declared but within three (3) years upon the courtrsquosruling for concluding the process the bankruptcy trustee shall proceed with a supplemental distributionupon the courtrsquos approval

355

If the bankruptcy estates are not enough to pay off the expenses and the total debts the bankruptcy trusteeshall file a motion to terminate the process In this situation the process will also be concluded by thecourtrsquos ruling to grant the motion



If the company is a company limited by shares and it is likely to be rebuilt or rehabilitated a creditor orcreditors of such company who have claims equivalent to 10 or more of the capital from the totalnumber of issued shares may apply to the court for reorganization of that company in order to avoidbankruptcy and dissolution



According to the Bankruptcy Law of the ROC (Taiwan) foreign bankruptcy proceedings have no effectover the bankrupt companyrsquos property in Taiwan

356

United Kingdom

Louise Verrill Partner Brown Rudnick LLP

wwwbrownrudnickcom email lverrillbrownrudnickcom tel 44 207 851 6072



Typically the creditor will take security by way of a charge over the debtorrsquos assets However otheroptions may include security by way of

Pledge where the creditor will take possession of assets until the debt is repaid

Lien where the creditor gains the right to assets or

Mortgage


If within specified periods before the insolvency a company enters into certain types of transactionsthe liquidator or administrator may be able to challenge them for example as

(i) Wrongful or fraudulent trading

(ii) Transactions at an Undervalue

(iii) Transactions Defrauding Creditors or

(iv) Preferences

Any floating charges may also be invalid if created within two years of the commencement of thewinding up or appointment of an administrator


Directors have a duty to act in the interests of creditors when a company is facing insolvency or isinsolvent Directors could face liabilities for example for wrongful or fraudulent trading ormisfeasance if the liquidators see fit to apply to the court with such a claim Misconduct could result indisqualification from office for up to fifteen years

2 Taking action


The Court must be satisfied that the company is or is likely to become unable to pay its debts as theyfall due (the lsquocash flowrsquo test) or that the value of the companyrsquos assets are or are likely to become less

357

than the amount of its liabilities (the lsquobalance sheetrsquo test)



Administration

Appointed administrators conduct the business and affairs of the company (often by continuing to tradethe business) with a view to realising as much money as possible for the creditors of the company Anadministration has a ldquocascade of objectivesrdquo The first objective is the rescue of the company as a goingconcern To the extent that this is not realisable or if this would be less beneficial to the creditors as awhole then the second objective takes effect which is to achieve a better result for the creditors as awhole than would be likely if the company were wound up without first being in administration Finallyif this second objective is not achievable the third objective of the administration is to realise thecompanys property for the benefit of one or more secured or preferential creditors

The Special Administration Regime (lsquoSARrsquo)

SAR is aimed at providing a better framework for the administrators of collapsed investment banks andinstitutions

Liquidation (often known as lsquowinding uprsquo) of which there exist two types

(i) Compulsory - a court based procedure and

(ii) Voluntary ndash which may be members initiated (lsquoMVLrsquo) if the company is solvent or creditor initiated(lsquoCVLrsquo) if the company is insolvent

Company Voluntary Arrangement (lsquoCVArsquo)

A CVA allows a company to address its financial difficulties through compromise or other arrangementbetween the company and its creditors (see Part I of the Insolvency Act 1986) A CVA is implementedunder the supervision of an insolvency practitioner known as the lsquonomineersquo before implementation of theCVA and as the lsquosupervisorrsquo afterwards


A scheme of arrangement is a statutory procedure under Part 26 of the Companies Act 2006 whichallows a company to make a compromise or arrangement with its members or creditors (or any class ofthem) Each class of creditor votes separately


Administration

(i) Out of court appointment by companydirectors

The companydirectors must demonstrate that the cash flow test is met and the proposed administratormust declare in a statement filed with the Court that he believes that the purpose of administration isreasonably likely to be achieved

(ii) Out of court appointment by Qualifying Floating Charge (lsquoQFCrsquo) holder

358

The holder of a QFC who wishes to appoint an administrator may do so if the terms of his securityinstrument allow it The QFC holder must give notice of intention to appoint to any prior ranking QFCand file it at Court

Court appointment

An application to the Court for the appointment of an administrator may be made by either the companyits directors or one or more creditors of the company or a combination of them

An interim moratorium commences upon the application being made The full moratorium takes effectwhen the order is made However where an administrative receiver is already in place the moratoriumdoes not take effect until his appointor consents to the application

Liquidation

Compulsory a creditor director administrator liquidator (if applicable) may apply for a court order

Voluntary the shareholders by special resolution

CVA

The shareholders and creditors approve the CVA following a proposal from the directors oradministratorliquidator (if applicable) The authorised nominee reports to the Court as to whether theproposal should be put to the shareholders and creditors A simple majority of shareholder approval isrequired and creditors representing at least three-quarters of debt owed


The company administratorliquidator (if applicable) any creditor or shareholder can petition the Courtto order a meeting of creditors or shareholders to agree an arrangement


No

3 Creditor issues

Administration

An administrator may pay dividends to secured and preferential creditors He can only pay dividends tounsecured creditors with the permission of the Court

The effect of the moratorium is to grant the company breathing space by giving it protection from itscreditors

Under a moratorium

(i) no step may be taken to enforce security over the companys property except with the consent of theadministrator or permission of the Court

(ii) no step may be taken to repossess goods in the companys possession under a hire purchase

359

agreement this includes a conditional sale agreement chattel leasing agreement and a retention of titleagreement except with the consent of the administrator or permission of the Court

(iii) a landlord may not exercise a right of forfeiture by peaceable re-entry except with the consent ofthe administrator or permission of the Court

(iv) no legal process (which includes execution and distress) may be commenced or continued againstthe company or its property except with the consent of the administrator or permission of the Court

The exception to the moratorium is where the Financial Collateral Regulations apply ndash the holder oflsquofinancial collateralrsquo is not bound by the moratorium and remains entitled to enforce its security Thisapplies to situations where the collateral taker has possession of the collateral and the collateral is inthe nature of a financial instrument or cash

Liquidation

Secured creditors have the right to enforce their security for the full amount of the debt If the value ofthe debt exceeds that of the security the creditor will rank as unsecured for the balance Unsecuredcreditors have no rights of enforcement

CVA

A CVA binds all unsecured creditors of a company but does not affect the rights of secured orpreferential creditors unless they agree to the proposals A moratorium is now available to smallcompanies (as defined by the Companies Act 2006)


Until the scheme is approved creditors may take any enforcement action available to them


Administration

Set-off only applies following notice from the administrator of an intention to make a distribution tocreditors

Liquidation

If prior to the liquidation there have been mutual credits debts or other mutual dealings between thecompany and its creditors proving a debt in the liquidation mandatory set-off will apply



Administration

A UK administrator takes over running the company from its directors and acts as agent of the company

The administrator may sell all or part of the companyrsquos assets This is the case even in respect of assets

360

that are subject to a floating charge The holder of the floating charge will have the same priority inrespect of the proceeds of sale as it had over the disposed of property

The administrator also has power subject to obtaining a court order to dispose of property that issubject to a fixed security interest or of property in the companyrsquos possession that is the subject of hirepurchase or retention of title arrangements or leases The disposal proceeds must be paid to the securityholder or owner of the property

Liquidation

The liquidator gains control after appointment and the powers of the directors cease

CVA

Once approved the nominee becomes the lsquosupervisorrsquo whose level of control will depend upon theterms of the particular arrangement


The directors of the company retain control


Financing will vary according to each procedure In administration administration expenses will rankabove the claims of floating charge holders and behind the claims of fixed charge holders Theadministrator may also borrow and cause the debtor to grant security for any borrowing undertakenSuch security will not however have automatic priority and the administrator has limited ability toobtain Court approval to override existing negative pledges

There is no equivalent market for DIP lending in the UK


Administration

The appointment of a UK administrator may entitle a contract counterparty to terminate its contract withthe debtor depending on the terms of the contract This can result in suppliers and customers taking theopportunity to renegotiate their contracts with the administrator However the administrator cannotreject unprofitable or burdensome contracts

Administration has the potential to erode the value of a business A landlord may not terminate a leaseby peaceable re-entry if the tenant goes into administration

The moratorium does not prevent a counter-party from exercising its right to terminate a contract withthe company if the contract contains such a right (though it prevents legal process being commenced)

Liquidation

The liquidator may terminate any onerous contracts to allow the company to avoid future liabilities Hewill also wind down the business


This will be dependent upon the specific terms of the arrangement

361



Administration

In administration the following rules of priority apply

(i) The administratorrsquos costs of realising fixed assets

(ii) fixed charge holders

(iii) obligations incurred under new contracts

(iv) general expenses and costs of administration

(v) preferential creditors

(vi) floating shareholders

(vii) unsecured creditors (only with approval from the Court)

(viii) shareholders

Liquidation

Creditors seeking to claim must prove their debt by submitting a formal claim (lsquoproof of debtrsquo) to theliquidator Claims will rank similarly to Administration Priority above


Creditor ranking will be dependent upon the specific terms of the arrangement scheme (see cram-downbelow)



Administration does not result in a cram down of the companyrsquos debt However the administrator mayassist in facilitating a scheme of arrangement or CVA (see below)

Cram down is available for both schemes of arrangement (under Part 26 of Companies Act 2006 requiremajority in number of creditors three quarters in value of claims) and for CVAs Proposals for theseusually need to be approved by more than half in value of the shareholders and more than three quartersin value of the creditors


Administration

362

The usual exit from administration for a company with insufficient assets to meet its liabilities is a CVAor Scheme of Arrangement (either of which can lead to a cram down (including of secured debt in thelatter case)) or liquidation Where the objective is to keep the company running as a going concern andthis is achieved the administrator will resign and the directors will re-assume control Note also thatthere are a number of rules ndash such as time bars and Court procedures which may conclude anadministration

Liquidation

The company is dissolved 3 months after the final creditors meeting

CVA

Upon successful completion of the terms of the CVA a company reverts to its original status whereby thedirectors and shareholders regain control Should the CVA fail another procedure may be commenced


Following implementation of the scheme the company reverts to its original status





(ii) terms of the companyrsquos finance documents and

(iii) indemnity of the lenders

Debt equity swaps are increasingly sought from US holders of UK bonds


Pre-packaged sales a company enters administration and its assets are immediately sold




(i) The EC Regulation insolvency proceedings opened in a member state must be recognised in allother member states

(ii) Cross Border Insolvency Regulations 2006 dictates that foreign proceedings must be recognised inany country

363

(iii) Insolvency Act 1986 s426 demands co-operation between specified jurisdictions

(iv) Letters of Request

(v) Common law Case law is developing and a universalist approach to insolvencies is beingchampioned by some leading insolvency lawyers and practitioners

364

Uruguay

Agustina Loinaz ALS Global Law amp Accounting

wwwalsuruguaycom email aloinazalsuruguaycom tel (+598) 2900 9730



1 Mortgages Mortgages need to be registered at the Public Registration Office to maintain thepreference right over other mortgages that could be held over the same property

2 Pledges Over goods that can be taken into custody by the creditor or kept in the debtorlsquos custody

3 Liens

4 Guarantees it can be established that if the debtor doesnrsquot pay under the terms of a contract a thirdparty ldquothe guarantorrdquo will pay in the debtorrsquos name

5 Embargo this can only be done by Judge The creditor should make the request to the judgeimmediately after it is found that there has been a first delay of a payment The embargo could bespecific over an asset or generally over all debtorsrsquo present and future assets

The embargo needs to be registered and guarantees that in case the debtor doesnrsquot pay the creditor canexecute over that asset However mortgagees and pledges have preference over an embargo


Transactions and any other contract entered into by the company can be attacked to restore the assets ofthe company before the declaration of insolvency To achieve this goal the Judiciary Act Statemen andCorporate Reorganization No 18 387 2008 provides special action called an Action of Revocation

Object of the action

This action aims to provide for the reintegration of the active mass assets or rights that had left thedebtors assets before the insolvency

The transactions that can be the object of this action are ones which presumably have been made withintent to defraud creditors or at least have the potential to deplete warranties

The reintegration process is only necessary when the obligations and debts of the company exceed theassets which guarantee the payment to the creditors If the assets of the company which could be subjectto closing sale or execution are sufficient there is no need to revoke the transaction even thosepresumed unlawful

There are acts or transactions that are considered intrinsic or inherent in the business of the debtorwhich cannot be revoke The exception is justified by the need to respect the acts and contracts whichthe company canrsquot function without

365

The objective of the revocation action is to restore things to the state they were immediately prior to theconclusion of the transaction or contract now revoked

What liabilities might director arise from the company trading while in distress

When managers or directors acting within the law diligently within the limits of the corporate purposeand in accordance with the bylaws there is no personal responsibility for the performance of acts ofmanagement and representation The consequences of their actions fall within the given company

Director responsibility will be born when in the management of corporate business and in companyrepresentation directors violate legal provisions or rules or commit offences of care The inertia of thedirectors in the exercise of their duties and negligence in observing their commitments are also a sourceof liability

2 Taking action


According to the Law ldquoJudicial Declaration and Corporate Reorganization Competitionrdquo the insolvencyof the debtor can be solved with a 1) payment agreement (which can be broad and flexible in content) orcan be derived from the 2) liquidation of assets (bankruptcy) Both stages have in common the aim tosatisfy creditors of the debtor They differ as to the means used to do so

Payment Agreement

A payment agreement is a preclusive nature pact concluded between the debtor and a majority ofcreditors which is binding on all creditors (logically the signatories but also dissidents and the absent)Once in the liquidation phase it is impossible to convene a payment agreement

The objective of the payment agreement is to agree a formula for payment of the obligations of thedebtor The law does not deal with such the substance of the agreement but greatly expands the list ofpayment formulas and leaves a door open for the debtor to create any legal solution

Besides the traditional amend and extend provisions it allows the transference of property theestablishment of a company to unsecured creditors the capitalization of liabilities the creation of atrust the reorganization of the company the administration of the property or any other contentwherever permissible Finally the Law allows that the agreement provides for the delivery of thedebtors assets to a cooperative of workers incorporated for some or all staff

Bankruptcy

This process implies the executionauctionsale of the companyrsquosrsquo assets to pay the creditors It can alsoimply the arrest of the debtor in case of fraud and the judicial occupation order of all property of thebankrupt and his books papers and documents The arrest of telegraphic correspondence of the debtorthe prohibition of payments or deliveries of the debtor


The state of insolvency of the debtor is presumed in the following cases

1 When there are more debts than assets determined in accordance with appropriate accounting

366

standards

2 When there are two or more liens or execution claims against the debtor for an amount greater thanhalf the value of the companyrsquos assets capable of execution

3 When there are one or more obligations of the debtor which have expired more than three monthsago

4 When the debtor had failed to pay its tax obligations for over a year

5 When there is permanent closure of the location of the establishment where the debtor conductsbusiness

6 When the Central Bank of Uruguay had ordered the suspension of one or more bank accounts of thedebtor or the closing of the debtors accounts in the banking system

7 When in the case of private agreement of reorganization the debtor fails to appear in court

However the presumption made by these cases about that the Company is insolvent can be proof wrong

The state of insolvency of the debtor is confirm in the following cases

1 When the debtor requests it

2 When the debtor has been declared bankrupt or any other form of bankruptcy by a judge of thecountry where that debtor is domiciled

3 When the debtor had made fraudulent acts to obtain credit

4 When there is an absence of the debtor or administrators to meet their obligations


Payment Agreement

The presentation of one or more proposed agreements is a debtors right it is not primarily restricted bythe insolvencyHowever the debtor does not enjoy absolute freedom the debtor must submit hisproposal in a given time and meet certain formal requirements

Special report on the continuation of the settlement

A trustee or auditor is named to report on the feasibility of the continuation or liquidation plan Thereport must refer exclusively to its viability that is the possibility of the future of the plan based onlegal and accounting documents In other words the trustee or the auditor should predict the success orfailure of the proposed solution

Opposition

Even if an agreement has obtained the necessary majority creditors who have been unlawfully deprivedof the right to vote or who voted against the proposed agreement or against the trustee or the auditormay challenge the agreement before a judge

Bankruptcy

367

The triggers of insolvency described above must be provendemonstrated to a Judge


1 The debtor

2 Any creditor

3 Any of the administrators or liquidators of a legal person even if they lack powers of representationand members of the internal control body

4 The partners personally liable for the debts of the civil and commercial companies

5 The co-debtors guarantors or guarantors of the debtor

6 Stock exchanges and trade associations with legal employers

7 In the case of inheritance any heir legatee or executor

The debtor will be required to apply for its own insolvency within thirty days of having becomeinsolvent or of knowing of his state of insolvency

The process is call ldquovoluntaryrdquo when requested by the debtorand will be call ldquonecessaryrdquo in the othercases

What is the extent of court Involvement

Payment Agreement

Powers of judge

The law establishes that the court must make an order approving the agreement if there are noobjections However this wording also contrasts clearly with the following article - which provides forthe case where objections have been deducted - which provides that the court shall render judgmentapproving the agreement or not

In the absence of opposition the law only gives one day for a judge to approve the agreement

Bankruptcy

The court will decide on

1 The suspension or limitation of the debtor free will to manage its assets

2 The appointment of a trustee or administrator of the business

3 Whether to ask for a meeting of Creditors to be held within a maximum period of one hundred eightydays

4 The registration of the judgment on the National Register of Personal Acts Section Bans andpublication of an excerpt of it in the Official Journal

The decision of the judge may be appealed by the debtor or by anyone with a legitimate interest withinsix days of the last publication

368


Payment Agreement

Requirements for submission of proposals

Opportunity

The law states that the proposal is to be presented at least sixty days before the creditors meeting

If the debtor does not file a proposed agreement at the time appointed on the board the judge is requiredto order the execution of the company assets

Formal requirements

The agreement must be submitted in compliance with certain requirements of form

1 It must be submitted in writing to the judge The text should clearly explain the payment proposal andconditions

2 The proposal must be signed by the debtor

Bankruptcy

The Court shall register the resolution within twenty-four hours

The publication of the extract of the judgment will be sorted and processed directly by the Court withintwenty four hours of issuance The Official Journal will then be published immediately


Bankruptcy

Continuation of the activity of the debtor The judicial declaration of insolvency does not imply thecessation or closure of the activity of the debtor unless the court decides otherwise at any time duringthe contest at the request of the debtor creditors the trustee or receiver

Payment Agreement

1 Continuation of the activity of the debtor

2 The creditors canrsquot claim their credits owe by the company during the time of the agreement

Are there any political factors which may eat into play

No

3 Creditor issues

All creditors whatever their nationality or domicile will be included in the list of creditors subject toclaim the debt

369

Equal treatment shall be given to all creditors within the same class subject to certain exceptionsexpressly provided by law

Effects on Creditors

How might secured creditor to enforce its security

Preferential loans

1 Mortgages

The property is the object to be executed to pay this creditor The execution goes to pay the mortgageinterest and costs and expenses If there is a remnant it will go first to other secured creditors and then tounsecured creditors In case there is more than one mortgagee the preference will go to the oldestmortgagee that was registered

2 Pledges

Pledges apply the same rules for mortgagees but the property can be movable The property is theobject to be executed to pay this creditor The execution goes to pay the pledge interest and costs andexpenses If there is a remnant it will go first to other secured creditors and then to unsecured creditorsIn case there is more than one pledge the preference will go to the oldest pledge recognized by theCommercial Law

3 Labor Creditors

The labor creditor whose claim has been recognized by past judgment on res judicata has a preferenceover the rest of common creditors If there is more than one the payment will be a pro rata

How are unsecured Creditors affected

Common creditors Unsecured creditors have no preferences or privileges (art 1750 C Com) Thesecreditors will be paid at the end of the process from the remnant of the execution of the assets Thepayment to this creditors is made a pro rata (each creditor will get the same percentage of their credit)meaning that it doesnrsquot matter if the debtis older in comparison to other creditors debt both will be payin the same percentage



During the process the Company the creditors or the judge can appoint some creditors or an auditor tocontrol the company with different levels of power to intervene in the Company

1 The shareholders can appoint an auditor who does not displace the governing body of the company(coexist) The auditor functions are examination of the business and advice

2 Precautionary agreements (judicial and extrajudicial) of the judicial liquidation

For precautionary agreements of corporations the law provides two types of interventions One of themis to put in two intervening creditors who will be observers of the debtors business and its purpose to

370

ensure the preservation of the debtor during the pendency of the process

The other involves the appointment of a creditor to audit the performance of the debtor while servingunder the reorganization

Provisional Intervention

The judge can appoint in the same act two informant creditors auditors Creditors should be chosenfrom the twelve largest non-privileged or controlling affiliates or members of an economic group

These creditors are appointed in order to intervene and report on the course of business Their functionincludes the examination of books and records of the debtorrsquos company The company will also renderaccounts to the designated administrator The designated creditors must report on the progress of thebusiness the accuracy of the documents attached to the management and on the basis of the bankruptcypetition

Definitive intervention

At the meeting of creditors it is appointed two auditors These auditors have the task of intervening inthe management of the company The corporation cannot sell its property receive or pay any amount ormake acts of administration without the permission or assistance of the auditors

Designation of the auditor

The designation may occur in different instances

a Appointment by judge

b Appointment by special majority of creditors

Functions

a intervenes in the course of business of the debtor

b makes a report on the state of business the reasons given in the specification and business conduct ofthe debtor and

c attends the meeting of creditors



No


Bankruptcy

The administrator will continue managing the company until all assets of the debtor are executed and theresult is distributed between creditors depending on their creditor class

371

Payment Agreement

Debtorrsquos company will continue with its business and will pay its creditors in the terms of the agreementuntil the last creditor is paid



Negotiations with creditors are possible but it is recommended that this is done by the legal process ofpayment agreement


No



- Tratado de Montevideo de 1940 to apply by the MERCOSUR Applies the jurisdiction of the countrywhere the commercial establishment is located In case there are establishments in different countries itwill apply for each establishment in the jurisdiction of the country is located so there will be manyprocesses It doesnrsquot matter the nationality of the debtor

- Convencioacuten Interamericana sobre Conflicto de Leyes en Materia de Sociedades Mercantiles de 1979

What is the approach of the companys jurisdiction in Respect of recognition of foreign proceedings

Art 192 to 195 of the Uruguayan company law which establishes that the foreign companies will beregulated by the place of incorporation unless that regulation goes against Uruguayan Order Public

372

USA

Daniel J Saval Partner Brown Rudnick LLP

wwwbrownrudnickcom email dsavalbrownrudnickcom tel +1 212-209-4905



Lien where the creditor takes security interest and gains the right to assets or

Mortgage a security interest in specific real estate property

Processes and requirements for perfection of security interests vary state-by-state


If within specified periods before the debtorrsquos insolvency it enters into certain types of transactionsthose transactions may be subject to attack by the trustee debtor-in-possession or its creditors as either

(i) Preferential transfers

(ii) Intentionally fraudulent conveyances

(iii) Constructively fraudulent conveyances debtor received less than reasonably equivalent value andeither (i) insolvent when transfer made or became insolvent thereby(ii) engaged in business for whichremaining property was unreasonably small or (iii) debtor intended to incur or believed it would incurdebts beyond its ability to repay

(iv) Fraudulent conveyances under state law (usually provides longer look-back period fortransactions)


In contrast to many other jurisdictions the United States does not recognize trading-while-insolventliability as an independent claim against directors Liability may attach on another grounds such asfraud or misrepresentation When a company is in what courts describe as ldquothe zone of insolvencyrdquodirectorsrsquo traditional duties of loyalty and good faith to the company and its shareholders are extended toits creditors as well Breach of either duty to a creditor may give rise to liability on a derivative basis

2 Taking action


The Bankruptcy Code does not require formal insolvency as a precondition to filing for relief The twochief tests for insolvency that courts use in evaluating a debtorrsquos financial condition are

373

(i) Cash-flow insolvency when a debtor is unable to meet its obligations as they come due and

(ii) Balance sheet insolvency when a debtorrsquos liabilities exceed its assets



Reorganization (Chapter 11) The debtor in most cases remains in possession of its assets and continuesto operate its business as the ldquodebtor-in-possessionrdquo Certain corporate actionsmdashincluding thoseoutside the debtorrsquos ordinary course of businessmdashrequire court approval During the initial phase of thereorganization the debtor-in-possession has the exclusive right to propose a plan of reorganization andsolicit the votes of creditors in favour of that plan Following this initial exclusivity period otherparties in interest including the debtorrsquos creditors and equity holders may propose rival reorganizationplans In addition any party in interest may for cause shown seek to have a reorganization converted toa liquidation (Chapter 7 case)

Liquidation (Chapter 7) In the typical case under Chapter 7 a debtorrsquos officers and directors areremoved a third-party trustee is appointed to wind down the debtorrsquos operations and to collect and sellits assets and disbursements are then made to the debtorrsquos creditors

Receivership In addition to relief under federal bankruptcy law state law may provide for creditors tohave a receiver appointed to replace a debtorrsquos management wind down its business and pay its debts


A debtor may file a voluntary petition for relief either to reorganize or liquidate State corporation lawand a companyrsquos charter and bylaws will define who is empowered to file a petition Approval of adebtorrsquos board of directors is generally required

An involuntary petition for relief may be filed by a debtorrsquos unsecured creditors Federal bankruptcylaw requires the support of three holders of non-contingent undisputed unsecured claims against thedebtor State receivership law varies but generally requires similar creditor support

3 Creditor issues

A key feature of US insolvency law is the automatic stay From the time of the debtorrsquos filing for reliefany and all collection activities by the debtorrsquos creditors must cease with violation punishable by courtsanction The automatic stay applies not only to traditional collection activitiesmdashfor exampleforeclosing on collateralmdashbut to any activity that could threaten the property of the debtorrsquos estateincluding the commencement or continuation of any lawsuit against the debtor and the creation of anylien or other security interest in the debtorrsquos property The automatic stay also requires the turnover ofany property of the debtor that is in the possession of a third party What is more courts will undercertain circumstances extend the automatic stay to the debtorrsquos officers and directors as well as itsparents subsidiaries and affiliates barring any collection activity against those individuals and entities


The Bankruptcy Code under certain circumstances preserves a creditorrsquos right to set off an outstandingobligation it owes to the debtor with one that the debtor owes to it The chief requirement for a set off isthe notion of mutuality generally understood to mean that the debtorrsquos and creditorrsquos obligations are

374

directly related to each other rather than being owed to a related or third party Set offs that do not meetthis requirement however violate the automatic stay



Reorganization Under Chapter 11 the debtor normally retains control of its own operations as debtor-in-possession Creditors and other parties in interest may request that the court appoint a trustee toreplace the debtorrsquos management for cause shown or where such appointment is in the best interests ofcreditors and the estate but such relief is rarely granted

Liquidation Under Chapter 7 a trustee is appointed to manage the debtorrsquos affairs wind down itsbusiness liquidate its assets and make distributions to its creditors

Receivership In a receivership the debtorrsquos management is replaced by a court-appointed receiverwho has the same role and duties as a trustee under federal bankruptcy law


ldquoDebtor-in-possession financingrdquo (ldquoDIP financingrdquo) is generally available to fund the debtorrsquos continuedoperations while it is reorganizing Such financing is only available upon court approval DIP financingis often provided by a debtorrsquos prepetition creditors and is typically granted higher priority in thedebtorrsquos capital structure than its prepetition debts Liens securing DIP financing can prime the liens ofprepetition lenders provided the prepetition lenders receive adequate protection for any diminution invalue In addition financing to aid the debtor in exiting its reorganization (ldquoexit financingrdquo) is generallyavailable subject to the approval of its creditors as part of the general plan confirmation processdiscussed below Because DIP and exit financing is procured in the private market the terms a courtmdashand creditorsmdashwill accept often depends on prevailing market conditions


In general a debtorrsquos contracts are unaffected by its filing for relief under the Bankruptcy Code USlaw explicitly provides that so-called ldquoipso factordquo clausesmdashcontractual provisions that purport toterminate the contract upon a partyrsquos filing for reliefmdashare ineffective once a debtor is in in-courtreorganization (however there are certain exceptions including in relation to contracts to extend creditor financial accommodations) The debtor retains the ability during the course of its reorganization todecide whether to assume or reject its outstanding commercial contracts and leases Those contracts thatare assumed become property of the debtorrsquos estate and may be assigned by the debtor either to itselfpost-reorganization or to a third party

Importantly the law is unsettled on a debtorrsquos ability to assume and assign intellectual propertyagreements running in its favour Courts are split as to whether patent copyright and trademarkslicenses are freely assignable with many requiring the consent of the licensor



375

The following priority rules (with certain exceptions generally inapplicable to corporations) apply inboth reorganizations and liquidations

(i) Secured claims (including if allowed related fees interest and costs)

(ii) Administrative expense claims

a Superpriority DIP financing claims

b Adequate protection claims

c All other administrative expenses

(iii) Wage and salary claims from the period immediately preceding the debtorrsquos filing

(iv) Employee benefit plan claims

(v) Government tax claims

(vi) Unsecured claims and

(vii) Equity-holdersrsquo claims



Cram-down procedures exist only in reorganizations The specific procedures are codified in theBankruptcy Code The Bankruptcy Code requires that at least one class of impaired creditors vote toaccept the reorganization plan and the remaining classes of impaired creditors can be crammed down


In a reorganization a case is concluded after a debtorrsquos plan of reorganization is confirmed by thebankruptcy court following voting on the plan and the courtrsquos adjudication of any objections to the planA reorganized debtor emerges with a discharge of its prepetition obligations A liquidation is concludedwhen the trustee has collected all of the debtorrsquos assets liquidated them through sales or litigationrecoveries and distributed the proceeds pro rata to the debtorrsquos creditors Following the liquidationthe debtorrsquos prepetition obligations are discharged and the debtor ceases to exist





(ii) obtaining requisite creditor consent (in the case of public bonds note that outside of a formal

376

insolvency proceeding US law does not allow a change in payment terms to be binding on a dissentingholder)

(iii) terms of the companyrsquos finance documents and

(iv) indemnity of the lenders


Prepackaged filings when a debtor enters reorganization after the requisite votes in favour of thereorganization plan have already been solicited and obtained



In 2005 the Bankruptcy Code was amended to include Chapter 15 which governs ancillary and othercross-border insolvency cases In doing so the United States adopted the Model Law on Cross-BorderInsolvency (the ldquoModel Lawrdquo) promulgated in 1997 by the UN Commission on International TradeLaw (ldquoUNCITRALrdquo)

The stated purpose of Chapter 15 is to provide effective mechanisms for dealing with insolvency casesinvolving debtors assets claimants and other parties of interest in more than one country TheBankruptcy Code provides that this general purpose is realized through five specific objectives

(i) to promote cooperation between the United States courts and parties of interest and the courts andother competent authorities of foreign countries involved in cross-border insolvency cases

(ii) to establish greater legal certainty for trade and investment

(iii) to provide for the fair and efficient administration of cross-border insolvencies that protects theinterests of all creditors and other interested entities including the debtor

(iv) to afford protection and maximization of the value of the debtors assets and

(v) to facilitate the rescue of financially troubled businesses thereby protecting investment andpreserving employment

In keeping with the Model Law Chapter 15 provides for the recognition of a foreign proceeding only ifit is pending in the country where the debtor has the center of its main interests (a ldquoforeign mainproceedingrdquo) or in a country where the debtor has an establishment ie a place of non-transitoryeconomic activity (a ldquoforeign nonmain proceedingrdquo)

377

Vietnam

Dang The Duc Steve Jacob and Tran Quang Indochine Counsel

wwwindochinecounselcom ducdangindochinecounselcom tel +848 3823 9640



Once bankruptcy proceedings have been filed with the court the company can no longer enter into anysecured transactions using the companyrsquos assets If however the creditor enters into the transactionprior to the initiation of bankruptcy proceedings she can secure the assets of the company through thestandard procedures provided for secured transactions Such procedures include entering into a contractwith the debtor (there are specific requirements for a secured transaction contract) and registering thesecurity with the appropriate authority There are several types of security but primarily the authoritiesrecognize mortgages (over immovable property and large ticket assets) pledges (over both tangible andintangible property) and other security interests (including deposits security payments collateral andguaranties)


In general the answer is no An exception exists however for certain transactions which are enteredinto by the company within a period of three (3) months prior to a courtrsquos acceptance of jurisdictionover an insolvency claim The following transactions are subject to this exception

a) donation of moveable or immoveable property to another personb) settlement of a bilateral contract in which the obligation of the business is clearly greater than that ofthe other partyc) payment of an undue debtd) mortgage or pledge of assets in respect of debts ande) other transactions for the purpose of disposing of assets of the business

In addition performance of contracts which are currently effective may be suspended if requested by aninterested party


Regular directors are not liable for reporting insolvency If a director has been appointed to be the legalrepresentative of the company however he must file a petition of insolvency to the court within three(3) months of becoming aware that the company is insolvent Such legal representative is subject to amonetary fine ranging from VND1000000 to VND3000000 in addition to a compulsory filing of thepetition of insolvencyAll directors and managers of the company are prohibited from establishing an enterprise or holding amanagerial position for up to three (3) years from the date on which their company is declared bankrupt

378

2 Taking action


After the decision to initiate bankruptcy procedures is issued a judge may decide to either (i) beginprocedures for recovery of business operations ldquoRecovery Proceduresrdquo) or (ii) apply for procedures toliquidate the companyrsquos properties and to write off its debts (ldquoLiquidation Proceduresrdquo) If in theprocess of conducting Recovery Procedures the court deems it advisable the court may abandonRecovery Procedures in favor of Liquidation ProceduresPrior to taking a decision the company is subject to a General Meeting of Creditors (ldquoGMCrdquo) TheGMC is a meeting during which the creditors of the company meet to discuss the advisable method forrecovering their interests in the company If the GMC decides that the assets and the performance of thecompany so justify they can either develop on their own or cause the company to develop a plan torestructure the business of the company in such a way as to allow for the eventual recovery of debtsThese Recovery Procedures are initiated when the judge accepts the creditorsrsquo decision at the first GMCto restructure the business of the debtor Once the court accepts a rescue plan creditors must superviseimplementation of the rescue plan to ensure that the company abides by the plan through the final phasesof recovery Concurrently the company must send the court a report on the status of implementation ofthe plan for recovery of business operations once every six monthsIf the GMC does not feel that Recovery Procedures are justified or if the court otherwise deemsLiquidation Procedures will be instituted Liquidation Procedures entail the liquidation and sale ofassets of the company and the equitable distribution of the proceeds of such sale to any creditors of thecompany


There are no informal procedures for the companygt


Neither the Recovery Procedures nor the Liquidation Procedures are particularly creditor-friendlyWhile creditors may have more control in the case of Recovery Procedures they are still the ones whomust bear the burden of reduced or delayed debt payments and the potential for the company to enterLiquidation Procedures at any time Liquidation Procedures on the other hand do not favor securedcreditors as the priority of payment of debts places employee and tax obligations ahead of the right ofsecured creditors And even then in the case of multiple secured creditors the payment may be reducedto a pro rata basis if the liquidation does not yield sufficient funds to pay all of the secured creditors infull


Insolvency is triggered when (i) an unsecured or partially secured debt is payable (ii) requests havebeen made for payment of the debt and (iii) the debtor has failed to repay the debts


The process for filing a petition to commence bankruptcy proceedings is fairly straightforward Thepetition must contain the

a) full date on which the petition is madeb) name and address of the enterprise in questionc) grounds for the request to commence bankruptcy procedures

379

In addition the petition must be submitted together with the following documents

a) Report on the business operations status of the enterprise with an explanation of the reasons for andbackground to insolvency if the enterprise is a shareholding company required by law to be audited itsfinancial statements must be certified by an independent auditing organizationb) Report on unsuccessful measures taken by the enterprise to remedy its inability to pay its due debtsc) Detailed list of the assets of the enterprise and the location of visible assetsd) List of creditors of the enterprisee) List of debtors of the enterprisef) A list specifying any joint debtors or guarantors of the enterprise andg) Other data which the court requires the enterprise to provide in accordance with law

Once the petition is filed with the proper court the obligations of the filing party are generallyconcluded However it is important to note that the filing party remains responsible for the veracity ofhis petition and may be liable if the court finds that the petition was filed for dishonest or maliciousreasons


A bankruptcy petition may be filed by the following persons

a) An owner or legal representative of a companyb) An unsecured or partially secured creditorc) An employee representative if the company fails to pay wages or other debts owing to its employeesandd) A shareholder or group of shareholders


Extensive The court is involved from the initial petition through the final declaration of bankruptcyOnce an allowed person has submitted a petition or notice of insolvency the court administers the entireprocedure From the first GMC to the appointment and guidance of the liquidation committee (appointedby the court to manage and liquidate the assets of the company during the Liquidation Procedures) to thedistribution of proceeds to creditors the court is the primary instrument of executing a bankruptcy


If the GMC and the court opt to pursue Recovery Procedures the company is allowed up to three (3)years to return to solvency There are no specific deadlines provided for conducting LiquidationProcedures In practice the full bankruptcy process can be quite lengthy


Upon the decision of the court to accept insolvency proceedings notice must be served to the creditorsand debtors of the company as well as published in a local newspaper for three consecutive editionsThe law is unclear as to whether responsibility for accomplishing this notice falls upon the court orupon the insolvent company


In addition to continuing to operate the business of the company under the supervision of the court thecompany has the right to participate in the formulation of a rescue plan in the case of application ofRecovery Procedures In the case of Liquidation Procedures the shareholders of the company have a

380

priority of right after unsecured creditors


Yes Vietnam allows for debtor in possession procedures in two instances First while the insolvencyprocess is being conducted and prior to the decision to pursue Liquidation Procedures the company maycontinue to operate as before and remain in control of all of its assets More substantially a debtor inpossession scenario is contemplated by the Recovery Procedures in which the company remains inpossession of its assets to the extent allowed by a rescue plan and continues to operate in an attempt toreturn to solvency


One point to be aware of is the emphasis on asset protection Any contracts entered into for three monthsprior to the acceptance of jurisdiction by the court may be invalidated if deemed to do harm to the stateof the assets of the company This is a major allowance that creates a situation where good faithtransactions can be terminated thus creating additional unsecured creditors of the company


In a developing country such as Vietnam it is always important to be aware of the potential for politicalfactors to affect a legal proceeding While bankruptcy is a rather benign procedure it is still possiblethat inter-ministerial politics or local politics may interfere particularly with the tax department andother departments that must close their books on the companyrsquos existence In addition the nature andpolitical position of the company itself may bring to bear higher level involvement

3 Creditor issues


Unsecured creditors take second to last in the list of priorities of right after bankruptcy fees employeewages and social insurance requirements In most instances it is unlikely that an unsecured creditor willsee much of her debt repaid by a bankruptcy proceeding


Where the judge issues a decision to commence Liquidation Procedures debts which were secured byassets mortgaged or pledged prior to the court accepting jurisdiction over a petition to commencebankruptcy proceedings shall be entitled to priority payments only insofar as such debt can be satisfiedby the sale of the attached assets if the value of the mortgaged or pledged property is insufficient to paythe amount of the debt the outstanding part of the debt becomes unsecured and is payable during theliquidation process of the assets of the enterprise if the value of the mortgaged or pledged property isgreater than the amount of the debt the difference shall be included in the value of the remaining assetsof the company


If the two parties have ldquoreciprocal obligationsrdquo for the same type of asset the debtor may set off anyclaims relating to transactions that were established prior to the decision to initiate bankruptcy Objectshaving monetary value may be used to offset the obligation to pay money Once the bankruptcyproceedings begin however all set-offs are prohibited

381


The law does not currently contemplate inter-company debt issues


Only towards subsidiary companies as they are treated as simple assets of the companyand liable to beauctioned off as part of the Liquidation Procedures


The first GMC will be convened within thirty (30) days after the court receives the list of creditors Atthe first creditorsrsquo meeting a report is delivered to the meeting by the head of the Liquidation Committeeregarding the performance and financial position of the company the results of the inventory andvaluation of assets the list of creditors and debtors and other relevant informationFollowing discussion the creditors may pass a resolution approving measures to restructure thebusiness operations and for the repayment of debts A resolution regarding a rescue plan requires atleast 50 percent or more of the unsecured creditors present at the meeting representing at least two thirdsof the total of the unsecured debts (ldquoRequisite Majorityrdquo) The first GMC can also recommend that thecourt appoints someone to manage the company in place of the person currently in charge of itsmanagementAfter adopting a rescue plan the court will order the plan be put to a meeting of creditors for approvalIf a resolution is passed by the Requisite Majority at a properly convened meeting of creditors the planwill be implemented by the courtrsquos order



Immediately upon receipt of a decision to proceed with bankruptcy the company is put under courtsupervision If the GMC deems it necessary to preserve the assets of the company they may request thatthe court appoint an interim manager to handle the day-to-day business of the company until such time asbankruptcy proceedings are concluded In the case of Recovery Procedures once the court issues adecision accepting the proposed rescue plan of the company the company will continue to operate underits own management Every six (6) months during the implementation of the rescue plan the companymust submit a report to the court outlining its progress in accomplishing the plan In addition the GMCmay continue to monitor and supervise the implementation of the rescue plan Any changes to the rescueplan must be approved by the Requisite Majority and the court


The law provides for fundraising as an element of the rescue plan but provides no specifics as to themethod which the company should use to secure such financing


It is possible though dependent upon the agreement of the GMC


There are few protections for employees in the bankruptcy process While a representative from thetrade union is to be included on the committee for the management and liquidation of assets there is no

382

other provision for employee representation in the bankruptcy process In the case of LiquidationProcedures the employees of the company have a priority right of payment second only to securedcreditors and the bankruptcy fees themselves In the case of Recovery Procedures the employees aregranted the protections offered by the Labor Law In both cases severance and dismissal benefits aredictated by the Labor Law


As discussed above any transactions that were entered into during the three months immediatelypreceding the courtrsquos acceptance of jurisdiction of a bankruptcy petition may be invalidated uponrequest In addition contracts that are otherwise in the process of performance may be suspended if themanagement and liquidation committee deem such suspension would be in the best interests ofpreserving the assets of the company In such instance the other party to a suspended contract wouldbecome an unsecured creditor of the company and paid with the same priority as any unsecured creditor



Creditors must file claims with the court Claims submitted to the court must request payment of debtsclearly itemize the debts state the amount of debt outstanding and specify the amount of debt that issecured or unsecured Additional evidence of the debt should be submitted at the same time Failure totimely file a claim acts as a waiver


Within sixty days from the last date of the notice published in newspapers of the decision of the court tocommence bankruptcy procedures


Secured assets are first applied to the creditor who holds the security Any remaining amount from thesale of such assets is pooled with the remaining assets of the company and distributed as follows

a) Bankruptcy feesb) Unpaid wages severance allowances and social insurance in accordance with the provisions of lawand other rights pursuant to the signed collective labor agreement and labor contractsc) Unsecured debts payable to creditors named in the list of creditors on the principle that if the valueof the assets is sufficient to pay all debts of all creditors each creditor shall be paid the full amount ofhis or her debt and if the value of the assets is insufficient to pay all debts each creditor shall only bepaid the corresponding proportion of his or her debt andd) Shareholders of the company


No The procedure is relatively straightforward though in practice the administrative nature of theprocess might create additional red tape that is not contemplated in the written law

383



No The GMC makes a decision by Requisite Majority being two-thirds of all unsecured creditorsThere is no discrimination by class


The judge issues a decision of bankruptcy at the same time as the issuance of the suspension of theliquidation procedures of the companyrsquos assets


Secured creditors are well protected by the secured transaction and bankruptcy laws Any mortgage orpledge of assets entered into prior to the courtrsquos acceptance of the bankruptcy petition will be honoredby application of the secured assets towards payment of any remaining debt Any amount outstandingafter such application will be counted as unsecured debt and treated as such This means that at the veryleast the secured creditor will obtain the value of the secured assets The outlook for the securedcreditor is therefore quite good In the case of Recovery Procedures there is no clear cut procedure fordealing with secured assets though it would seem that they are applied to payment of secured paymentsprior to the full implementation of the rescue planUnsecured creditors on the other hand have a much harder row to hoe While they participate equally inthe GMC their recompense comes well down the list and when it does come it is likely to be paid at apro rata basis meaning the unsecured creditor will only get pennies on each dollar owed Thoughunsecured creditors also have the opportunity to be very involved in the establishment andimplementation of the rescue plan should they decide to pursue Recovery Procedures That involvementalone would suggest that Recovery Procedures are preferred over the much more final LiquidationProcedures



It is possible to negotiate a non-statutory restructuring for example the creditors may become membersof the company and join in daily business activities to restore the companyrsquos operations Renewal ofdebts and debt equity swaps are also popular for the creditor to seek the prospective payment


No



Vietnam has not signed any treaties relating to insolvency that will affect a company It has beenrecommended however that Vietnam should apply the UNCITRAL Model Law of Cross-BorderInsolvency

384


The law in this area is poorly developed It is unclear whether recognition of foreign insolvencyproceedings will be considered as the provision of judicial aid or as the recognition of a foreign courtorder If the company is a subsidiary of a multi-national or foreign company bankruptcy of the parentcompany or owner may be submitted as a reason to close the business in Vietnam

385

Foreword


Australia

Austria

Belgium

Brazil

Canada including Quebec specific variations

China

Costa Rica

Denmark

Estonia

Finland

France

Germany

Greece

India

Indonesia

Ireland

Israel

Italy

Korea

Latvia

Lithuania

Malaysia

Mauritius

Mexico

The Netherlands

New Zealand

Romania

Russia

Serbia

Singapore

South Africa

Spain

Switzerland

Tunisia

Taiwan

United Kingdom

Uruguay

USA

Vietnam